Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

MJ ERVIN & ASSOCIATES

Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

MJ ERVIN & ASSOCIATES

..............................Price History .......................................................................................................Price History ....................................................8¢ Pump Price) ................................................. 48 Figure 25: Outlet / Volume Relationship ...................... 40 Figure 18: 1995 Average "Blended" Pump Price ...................................................................................................... 69 Figure 36: Halifax .......................................................Selected Goods & Services .............................................................. 46 Figure 23: Average Annual Throughput per Outlet....................................Price History....... Pump Price (nominal ¢/litre).........................Price History........... 25 Figure 7: Outlet Representation by Mode.................. 36 Figure 17: Study Market Methodology ......Price History ......... 44 Figure 21: Gross Marketing Margin Elements ................................ ex-tax elements ................................. 71 MJ ERVIN & ASSOCIATES i .............. Costs..................................................................................... 4 Figure 2: 1996 Average Prices/Margins .....Price History...... 66 Figure 35: Saint John NB ............................................................................................................................. 47 Figure 24: Outlet Volume vs............................................ 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)................................................... 24 Figure 6: 1995 Retail Outlets by Province ..Price History.....Regional & Urban Groupings....................... 45 Figure 22: Petroleum Gross Product Margins .............................................................................. 62 Figure 33: Ottawa ...........Regular Unleaded ..................................Price History ............................................................................................................................................................... 57 Figure 31: Winnipeg ........................... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.................................................... Gross Product Margin ... 42 Figure 19: Pump Price ............................................................................................Price History ....................................................................................................................................................Price History........................ Income..................... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ......... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ............................... 70 Figure 37: Charlottetown ............ 50 Figure 27: Victoria .............. 24 Figure 5: Canadian Retail Outlet Population ....Price History ....................... 63 Figure 34: Montreal ..............................................................................................................Selected Centres ............................. 54 Figure 29: Calgary ........................................................................................................................1988-1995 ........................... 34 Figure 15: Monthly Rack Prices: Selected Markets .. 33 Figure 13: Monthly Gross Marketing Margins............................................................................................................................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) .......................................... 43 Figure 20: Ex-Tax Pump Price Elements ..................... 56 Figure 30: Regina ... 58 Figure 32: Toronto .................... 49 Figure 26: Outlet Revenues...........................tax....................................... 28 Figure 8: Outlet Representation by Service .................................................................................................. 16 Figure 3: 1996 Average Regular Gasoline Margins (56........................List of Figures Figure 1: Pump Price / Margin Model........................................ 53 Figure 28: Vancouver . 30 Figure 10: CPI Index Comparison .......................... 35 Figure 16: Monthly Demand vs.....

.................................................................. 13 Table 2: Taxes on Regular Gasoline on December 31.............. 15 Table 3: Selected Study Markets ..............................List of Tables Table 1: Downstream Sales Channels .................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue.......................................................... 51 MJ ERVIN & ASSOCIATES ii ...................................................................... 1996 .........

5 ¢ 0. dealer income. Price competition occurs at three distinct levels in this industry.1 ¢ 5. the Canadian retail marketing sector realized an average gross product margin of 3.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.5 cents per litre on the sale of regular gasoline in a typical major urban market. represented by crude. rack. Natural Resources Canada (NRCan). forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. and a foundation for effective policy development. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. 1996 Average Prices and Margins . and ex-tax pump prices. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. These prices are determined in a competitive marketplace. each with unique MJ ERVIN & ASSOCIATES iii . and the Canadian Petroleum Products Institute (CPPI). together with a separate review of the refining sector.4 ¢ 19. supplier costs and profitability.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.2 ¢ 24. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.8 ¢ TAX 28. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline.3 ¢ 28.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56. This study.

The resultant margins are therefore a reflection of the state of product supply. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). well over half of all outlets in Canada operate as lessees or independents. due to its prominence in the public and media domain. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. this study focuses on the retail gasoline sector. nine of the past ten years. While each of these marketing channels operates in a competitive environment.000 in 1989. Convenience store. demand and other competitive factors existing at the time. From 1986 to 1995. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. are examples of ways in which outlet petroleum sales are augmented by other revenues. Dealers have a variety of relationships with their supplier. which potentially allow for reduced margins at the gasoline pump. Approximately 16.500 retail outlets were in operation in Canada in 1995. and accordingly. car wash. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure.dynamics. compared to about 22. and the traditional automotive service bay. and declined by 10 cents per litre measured in constant dollars. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry.

This has both resulted in. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .The “tax-included” nominal pump price increased over this same period. however. From 1991 to 1996. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. as a consequence of refinery plant rationalization (closures) and a modest demand increase. MJ ERVIN & ASSOCIATES v .rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. As a result of these trends.crude) 5¢ Marketing Margin (retail . both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. and has been a result of several factors including: • • • improved refinery utilization and efficiency.

This was integrated with selected NRCan price data. several “outside variables” (product taxes. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. and one by one. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. A wide range of petroleum gross product margins were evident. With few exceptions. but also had significantly higher throughputs per outlet. This provided for market-bymarket and regional comparisons of key competitiveness indicators.Comparison of Canada. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. When petroleum gross product margins were compared to their corresponding outlet throughputs. although this study provides an independent confirmation of this. to derive 1995 average petroleum gross product margins for each of the 19 markets. With the participation of several CPPI member companies. That such a relationship should exist was not surprising. 19 markets representing a broad range of conditions. wholesale product cost and freight charges) were isolated from the pump price. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. MJ ERVIN & ASSOCIATES vi . were selected for a detailed review of outlet economics. rural markets.

sales processing.000 5.. not poor competition.000. and in major vs.000. an additional goal of this study was to undertake a comparison of outlet profitabilities. the residual revenue is available as profit to be re-invested into retail operations. corporate charity. etc. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.6624 1. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. head office and regional office overheads.000 6.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. and his personal labour investment.000. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .6634Ln(x) + 76.000.• Smaller markets performed as competitively as larger centres. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue.000. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. Consequently.000 2.000 3.000. which reflects his investment in the outlet. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. of which gross product margin and throughput are only two of several factors. This study showed that an average outlet net revenue in the 19-market study group was about $70. These costs would include salaries of marketing representatives and management.000 Volume (litres) 4.000. revenues from ancillary operations (eg: convenience store. supplier profit: after the above costs are allocated. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. brand advertising.962 R2 = 0. and/or distributed to shareholders. smaller markets.

000) $(200.$154. suppliers likely incurred a net loss on outlet operations in 1995.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.000) $(100. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. Average Outlet Income (before marketing overhead costs) BC/PR $300.000 $150. distant outlets are clearly higher than those associated with concentrated urban markets. and that petroleum sales revenues alone. for which this study had no specific data.000 vs. by all objective measures available to this study.000) $(300. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. The Canadian retail petroleum products industry. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.000 $50.000 per year. $61. 1. respectively. at 1995 prices.000 $250.000 $100. Although an objective measure of competitiveness is elusive.000) $(250. after allowing for estimated dealer profit and supplier overhead.000) $(350.000 $200. were insufficient to cover outlet costs. Despite this difference.000) $(150. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers.market study group. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

MJ ERVIN & ASSOCIATES

ix

While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

MJ ERVIN & ASSOCIATES

x

driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

MJ ERVIN & ASSOCIATES

xi

Outlet throughput is a key determinant of inter-market pump price differences. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). most outlets used in the 19-market study represent major integrated oil companies. That such a relationship should exist was not surprising. Indeed. Thus. and the associated industry initiatives which are ongoing in nature. most markets. not excessive profits. Nevertheless. serve as perhaps the most significant indicators of competitiveness in the downstream industry. assuming all other costs were unchanged. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. had petroleum margins which were commensurate with average outlet throughput for that market. in the long term these fluctuations are likely more reflective of market restorations. crude costs. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. While these economics might appear to place this industry in a position of poor viability. Industry profitability is extremely sensitive to very small changes in pump price. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Also. if Canadian average pump prices were only one cent higher than they were in 1995. virtually all of the 19 study markets exhibited similar levels of competition. 7. 8. although this study provides comprehensive evidence of this. Thus. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. Thus. based upon an assumed posted rack price. but to increases in underlying rack prices. Both the downward trend in margins. When these margins were compared to their corresponding outlet throughputs.• • • improving production efficiency through refinery plant rationalizations (closures). from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. When plotted against the margin-volume model. this industry sector would have realized profits of unprecedented proportions. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. despite the predisposition of many observers to use them as such. and in turn. A wide range of petroleum gross product margins were evident within the 19market study group. regardless of size. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Also. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. these findings clearly show that pump price increases are ultimately linked not to increased profits.

reduce pump prices. which could actually inhibit competition. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). isolated markets face particular challenges: although found to be highly competitive. Smaller. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. A full-serve retail gasoline outlet typically employs 3-5 staff. which should. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. The loss of employment represented by a station closure may be of some concern to smaller communities. thereby improving petroleum volumes and ancillary revenues at the remaining sites. reducing the number of outlets may also reduce the number of competitors. While competitiveness in most smaller markets was shown to be as active as in larger centres. poor outlet throughputs were generally the predominant factor. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. the solution would be to encourage some dealers to exit the market. The costs of most consumer goods in smaller. more isolated markets are generally higher than in larger centres. 9. there are three points to consider: • • In very small markets.product margins than larger markets. In suggesting this approach however. average pump prices were relatively high. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs.5 million fewer litres of gasoline than a group A (major centre) station. in order to build upon the findings in this study towards a full understanding of the dynamics at work. This created some economic pressure to sell product at a higher pump price. and this study showed that gasoline prices were no exception. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. • • At first glance. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. MJ ERVIN & ASSOCIATES xiii . it would seem that if local government in smaller markets were interested in lowering pump prices. other factors exist which contribute to relatively high margins and prices. according to the margin-volume model.

and the perceived effect on their markets. This study proposes rather. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. will likely preserve a highly competitive petroleum market. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. and likely others in Nova Scotia. is viewed as an agency which exists to the benefit of industry and consumer alike. the degree of price competition in the retail petroleum has in effect. Also.10. and in turn. This competition then. The historical record is clear however: since deregulating pump prices. is well beyond the scope of this study. under the current PEI regulatory structure. The federal Competition Bureau for example. Retail ancillary operations are a critical element of petroleum price competition. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). car wash. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. as marketers find even more innovative ways to attract market share. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. that where a healthy competitive climate exists. and as such. depressed petroleum revenues. 11. as it does in the Canadian petroleum marketing sector. direct regulatory interventions may have an adverse effect on competitiveness. Charlottetown. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. Convenience store. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. the Halifax market. is both the cause and consequence of increased activity in ancillary operations. are an acceptable limitation on pure competition (Finding 8). and the traditional automotive service bay. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). has seen a decline in pump prices relative to other Canadian markets. does not appear to benefit in consumer terms. possibly to the detriment of the consumer. many national and local environmental regulations exist for good cause. characterized by narrow product margins and relatively flat pump prices. sometimes below that of outlet operating costs. As these findings show. MJ ERVIN & ASSOCIATES xiv .

• • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. and the converse image held in much of the public domain. petroleum marketing competitiveness. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. 2. along the lines of the model used in this study. using Canadian and foreign selected markets. A regular comprehensive competitiveness evaluation. using Canadian and foreign selected markets. not inhibit. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Develop cooperative industry research into marketing sector competitiveness issues. in a simple format designed for consumers and legislators. margins and competitiveness factors. and the nature of competitiveness influences. Public perception measurement. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. This should be in the form of a quarterly summary of price trends and related measurements. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Improve public understanding and awareness of competition in the petroleum marketing sector. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives.1. • • MJ ERVIN & ASSOCIATES xv . Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research.

• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. • * * * Better understanding of this industry. and regulators alike. by industry. and issues/opportunities facing such markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and in particular. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. using Canadian and foreign selected markets. MJ ERVIN & ASSOCIATES xvi . A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. consumers.

including a regional. . or even communities within the same region. face a number of challenges: a poor public image... A working group represented by Natural Resources Canada (NRCan). competitive pressures from US and offshore refiners.. The SCF laid the foundation for supplementary studies... region by region across Canada.. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.. leading to more effective policies and reduced uncertainty for future investment. and a challenging array of potential environmental initiatives.. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. and in comparison to the Canadian national average and nearby USA markets”. and in the process.to provide a sound database upon which more effective policy decisions can be made.Introduction Background Canada’s petroleum refining and marketing sectors. which comprise the “downstream” oil industry. and that issues and challenges be identified so that conclusions and recommendations can be made “. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector... Project Objectives The working group established as the primary objective of this study “.to draw comparisons with nearby USA markets.to better understand the competitive opportunities and challenges. or petroleum marketing portion of the study. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. and regional differences which face the petroleum products retail industry. and .. In 1995.to help the industry cope and to enhance competitiveness.” MJ ERVIN & ASSOCIATES 1 .” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. and MJ Ervin & Associates was selected to undertake the “rack to retail”. .to determine the key factors which drive competitiveness in specific markets.. the Canadian Petroleum Products Institute (CPPI).to analyze the rack to retail market and the market structure for refined petroleum products. Specific purposes of this study would be: • • • • “. and Industry Canada was convened to undertake this project. to name a few.

The study does provide comparisons with US markets on a national level of detail. Ultimately. due to the considerable data gathering difficulties that such an approach would entail. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. in Appendix I. and in order to provide insights into the range of competitive dynamics that can exist. and the effect of competitiveness on each subsector. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . Findings are stated in bold and are summarized in part E of this report. Supporting data to these charts can be found in Appendix II. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Part C: Historical Trend Analysis provides an overview of prices. through a multi-faceted approach. Part D: Selected Market Study presents the findings of a diverse 19-market study. margins and demand patterns over the past several years. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. It also relates consumer demand patterns to pump price fluctuations. • Part E: Conclusions and Recommendations summarizes the study findings and.The study meets these objectives. Many of the findings in this report are presented in graphical form. or which have a specific meaning in the context of this report. from which some important findings are made. presents conclusions and recommendations which arise from the study findings. Unless otherwise stated. undertaken as part of this project to: • make a more detailed examination of price. and a foundation for effective policy development. Specific comparisons of specific Canadian and US consumer markets were not made.

. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). facilitated some of the data gathering needs of this study. Finally. and also participated in the steering committee.• Industry Canada.. and Shell Canada. Ministère des ressources naturelles du Québec. CPPI. MJ ERVIN & ASSOCIATES 3 . We gratefully acknowledge these companies.. Suncor Inc. including Ultramar Canada. through Bob Clapp. Environment Canada. assisted in securing the support and participation of member companies in the selected markets phase of the study. Suncor Inc. Petro-Canada. NRCan. Imperial Oil Ltd. through Maureen Monaghan and Huguette Montcalm. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. These included: Canadian Tire Petroleum. and provided critical guidance and feedback at several key stages in the process.. chaired the steering committee. Shell Canada. Consumers Association of Canada. Ontario Ministry of Environment and Energy. The Canadian Petroleum Products Institute. Petro-Canada. for their assistance. and Industry Canada. and their 481 retail associates whose outlet data was used in our analysis. Natural Resources Canada. • • Several organizations participated in two key review sessions.

It is this particular feature of petroleum products . or taste. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. In fact. its price. These relationships can be modeled. but simply. unlike many consumer products. as they are in Figure 1.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. principally of motor gasoline. multifaceted industry. and serves to explain several factors that together determine retail gasoline prices at any given time.price . the particular quality of gasoline which is of most interest to consumers is not its colour. texture. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. as this study shows.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. most Canadians relate to this industry in one specific way: as consumers. And. Yet.

This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. A consumer however. (implying that the stated margin represents net income or “profit”). gross margin represents revenue only. objective measurement for competitiveness. While both perspectives are valid. Each margin is quantified by its defining prices. and in fact inextricably related. Ultimately however. an understanding of the term itself is necessary. is more likely to equate the term with “value for money”.from the total pump revenue. this study’s use of the term relates to gross margin. any operating expenses must then be considered before making any determination of profits. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). So defined. this study examines competitiveness from the latter. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. Before examining each of the model elements. MJ ERVIN & ASSOCIATES 5 . margins are squeezed or expanded accordingly.Many of the terms introduced and explained in this section are used extensively throughout this study. these stakeholder revenues are derived from the revenue from the retail sale. it is important to define the term “margin”. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. each essentially taking a share1 . From an industry perspective. Gross margin is simply the difference between two price points. While this term is often associated with the phrase “profit margin”. evaluating competitiveness is therefore a partly subjective process. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. “competitive” may be synonymous with “viable”. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down.or margin . consumer perspective. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard.

Inevitably. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). More importantly. and ideally many entities offer the same or similar products (brand variety). Accordingly. is the only real option in the long term. Price competition. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors.Unlike many business or economic concepts. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. the result of price competition is reduced profit. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. a universally acceptable definition of competitiveness is elusive.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. 1986: “Competition may mean very different things to different people. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged.” Price Competition in the Oil Industry In order to assess competitiveness.” “. if market conditions allow a sufficient number of players to remain profitably engaged. Competition can only be sustained therefore. The actions by business rivals place an upper limit on the prices a firm can charge for its products. it can frustrate communication and obscure analysis. in the sense in which it is something in the public interest. An effective functioning of markets also permits smaller competitors to expand if they meet the test.. Conditions for a competitive market can be deemed to exist when: • • more than one. or in other words. and unless care is taken to use the word precisely.. represents a process by which prices are set. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. To achieve this. the degree of competition within a market. Simply put. competitors can either restore higher prices or reduce costs. this usually requires a reasonable number of competitors. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . as competitors seek to attract market share through lower prices. Since a competitive market effectively limits the price option. reducing costs. and the entry of new competitors and new ideas. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. improving efficiencies. in order to maintain some level of brand variety. provide some means for comparing the type and to some extent. one must ask how marketers compete. Technological change and innovation are the large levers of competition in industry.

and in retail markets. 1971). A refiner in Toronto may well compete with a refiner in Buffalo. 4th Ed.44 (1st Dec. in rack markets.the variables at their disposal. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. most Canadians relate more in terms of retail gasoline marketing. whose main 1 E. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. or four P’s: Product. is false. Jerome McCarthy. In fact.. so a brief description of these. • Thus described. Given the commodity nature of petroleum products. It is also important to stress that the market ultimately sets rack and retail pump prices. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. Place. and Promotion. Basic Marketing: A Managerial Approach. and the downstream industry. The dynamics of upstream and refiner competition are major studies in themselves. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist.: Richard D. competition in the crude and rack markets deserves some mention. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. p. The converse notion that the industry establishes a “should be” margin. 1960) 2 Although distinct. commonly known as the “marketing mix”1. the geographic scale of competition is an important consideration. and as will become more evident in this study. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. the raw material from which gasoline is made. and are beyond the scope of this study. Nevertheless. the “oil industry” consists of two distinct industries: the upstream industry. MJ ERVIN & ASSOCIATES 7 . whose main activity is the exploration and development of crude oil. the most effective of these as a competitive tool is price. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. which in turn defines the margins. New York. Price. and are generally known as integrated oil companies. (Homewood. which in turn defines a proper market price. Irving. particularly in the crude (upstream) industry and refiner sector. Within the broad context of the oil industry. some organizations have operations in two or more of these markets. Ill.

from the exploration for potential crude or gas reserves. production. implying that it fluctuates. Within the scope of this study. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. that is to say. in several commodities trading centres around the world. While this study focuses on the downstream industry (and in particular. as a minor contributor to the world crude supply. which it does on a continuous basis. Canadian producers are known as “price takers” rather than “price setters” of crude prices. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. rather than a fixed value. consequently.activity is the refining of crude oil into petroleum products. Infrastructure The upstream oil industry encompasses a broad range of operations. and in the open market structure that exists in Canada. and refinery production methods. its marketing operations). due to variables such as crude quality. and the delivery and sale of these products to the consumer. Although this industry is not the focus of this study. alongside major producing countries such as Saudi Arabia. it is important to examine its relationship with its neighboring downstream industry. which finds and produces crude oil . Canadian producers must compete to sell their production to refiners. and transportation of crude oil to the refinery plant. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. MJ ERVIN & ASSOCIATES 8 .the raw material from which gasoline is made. Crude oil is a commodity which is traded in a global marketplace. which gives an accurate portrayal of month-to-month crude price fluctuations. The upstream industry’s crude price is represented in Figure 1 as elastic. Canadian producers have virtually no influence over world crude prices. gasoline grade. our crude prices rise and fall according to price benchmarks established far beyond our own shores. it is probably sufficient to say that. drilling. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. In providing historical comparisons of crude to rack/pump prices.

manufactures a range of refined petroleum products including gasolines. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. and lubricants. and hopefully realize some production. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. crude is only one of several factors that influence pump prices. buy refined products from the refiner and sell them to the end-use customer. diesel. which in oil producing provinces such as Alberta. and numerous safety and environmental safeguards. This sector acquires crude oil.While some suggest that the price of gasoline should rise and fall exactly with the crude price. In addition. maintenance. As a general measure: Finding 2: 1996 average crude price. day-to-day plant operations are cost-intensive. its predominant feature is the plant facility which. put simply. was 19. who manufacture petroleum products from crude oil. As is typical of many manufacturing organizations.1 cents per litre. is the provincial government. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. A modern refinery is a sophisticated work of engineering. personnel. and from this feedstock. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. involving energy. heating fuels. The focus of this study is on the marketing sector of the downstream petroleum industry. and marketers who. oil producers must explore for potential reserves. From this revenue. or roughly 34 percent of the pump price. drill for. and some attention to the refiner sector is therefore given here. MJ ERVIN & ASSOCIATES 9 . and pay out royalties to the resource owner. in the petroleum sector. as a factor of the regular gasoline retail pump price. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. is called the refinery.

2 MJ ERVIN & ASSOCIATES 10 . the gross refiner margin is elastic. there would be little or no market-driven competitiveness in the refiner sector. only rack price information is readily available in the public domain. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. which may cause Gross Refiner Margin to be slightly overstated. Of these three refiner prices.the price charged for immediate supply on an “as available” basis. indicative of a competitive wholesale rack market. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. external measurement of the current market value of a particular petroleum product. This margin provides for plant operating costs as described above. and accordingly. representing major Canadian population centres. since the market-driven rack price provides an objective. Canadian refiners produced only sufficient product to supply their own networks of retail facilities.this is the “internal” price charged by a refiner to the marketing arm of the same company. the relative competitive strength of any given rack market is difficult to assess. being squeezed or expanded between these two price points. refiners sell their product under a variety of arrangements. they use rack price as their basis. Although contract and transfer prices are distinct from rack price. confidential terms between the seller and specific buyers. transfer price . 1 Dealer Price is not included here.Price/Margin Model Elements For simplicity.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. reflecting the cost of transporting the crude from the producing region to the refinery plant. The existence of rack price in a given market is not of itself. not the refiner sector. some clear competitiveness indicators exist. Contract and transfer prices are not openly shared. For simplicity. On a national basis however. but with no material effect upon the Gross Product Margin derivation. In fact the refiner typically pays a higher price than the benchmark crude price. If for example. the gross refiner margin is the price at which the refiner sells its refined product. In simple terms. Wholesale volume data is not readily available on a market-specific basis. less the price at which it bought its raw material2 (rack price minus crude price). While refineries are always rack price points. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. which provides an independent and objective determination of rack-based gross refiner margin. Since both crude and rack prices fluctuate according to market forces. as this price point exists within the marketing sector. and a return on the considerable capital investment in the plant facility. contract price . as they relate to negotiated. this model only uses the benchmark crude value. For a competitive rack market to exist. many of which do not have integral refineries. which can be broadly categorized as follows1: • • • rack price . In fact. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™.

many US and European refineries are in practice. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. but where pipeline or marine fuel terminal facilities exist. 1 Based on Octane Magazine Retail Outlet Survey data. In practice. but at the expense of marketing income. In practical terms. this limits a marketer to a relatively short range (perhaps 1. and which supply petroleum to about one-third of all retail outlets in Canada1. from any one of several regional refiners. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price.for example. to so-called “independent” petroleum marketers. wholesale refined product is bought and sold across very large distances. even overseas. In these cases of so-called “integrated” refiner-marketers.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . arises. or transfer price. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. Integrated Refiner-Marketers In Canada. integrated refiner-marketers establish transfer prices at. in order to maintain realistic accountabilities within each of the two sub-sectors. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). who compete for a share of this demand. but with their US and European counterparts. the question of the internal selling price. would produce better than expected refiner income. As shown in Figure 15 (page 35). Canadian refiners must therefore be price competitive not only with each other. who themselves do not refine petroleum products. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. or close to. market-driven Rack (wholesale) pricing of petroleum products. petrochemical producers. In examining the structure of the Canadian refiner sector. The mechanisms that drive rack prices are more fully discussed on page 36. potential sources of wholesale product supply for most Canadian non-refiner marketers. market-driven rack prices. due to the relatively small transportation cost. and in the case of gasoline. for example. most refiners also participate in the marketing and retailing of petroleum products. to major industrial consumers.000 km) for overland truck transport. as there is no obvious market mechanism to regulate its setting. MJ ERVIN & ASSOCIATES 11 .

in the minds of many consumers. It is this sector which has direct contact with the petroleum consumer and it is this sector.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. and purchase at or near the established rack price. and who essentially deal directly with the refiner. or in the case of cardlock facilities. principally into commercial trucking operators’ vehicles. • • MJ ERVIN & ASSOCIATES 12 . Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. the most recognized element of the downstream oil industry. gasoline price and competitiveness issues attract considerable public. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. farming. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. including mining. which “sets” the retail price of gasoline. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. media and regulatory attention. as a popular and relevant “window” on the petroleum marketing sector. trucking. Retail Sales to the domestic motorist. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. home heating. Marketing operations within this sector can be broadly classified into three elements. each with its own distinct infrastructure. and aviation. product is sold from a central facility. Within this industry sector. For this reason. Wholesale Sales to a wide variety of customers. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually.

Sales of home heating fuels to residential furnace oil customers. as principal elements of petroleum marketing operations. Sales of petroleum products (principally gasoline) through retail gasoline outlets. by delivery tank truck. Sales of aviation fuels at major and secondary airports across Canada.300 bulk sales outlets in Canada. to the aviation fuel consumer. and usually supply customers by delivery to the customer’s own storage tank. Direct sales generally do not involve any marketing sector infrastructure. These outlets usually have considerable inventory capacity. which is generally less than the rack price. one final element of the pump price model must be reviewed. at a negotiated contract price. Sales to major industrial accounts. according to the contractual relationship between the supplier and the dealer. to the motorist consumer. typically at the “rack point”. usually involving some aspect of the marketing sector infrastructure. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Before examining this sector in detail. in smaller centres. There are over 850 cardlock outlets in Canada. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. such as product transport and/or storage. Retail outlets are operated in a variety of modes. and regular gasoline in particular. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier.500 retail gasoline outlets in Canada. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. There are about 16. MJ ERVIN & ASSOCIATES 13 . as discussed. In major centres dedicated Home Heat centres provide this service. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. Sales to commercial and industrial accounts by the wholesale marketing sector. heating fuel delivery is an integral part of a bulk sales outlet. Sales to non-refiner petroleum marketers. often delivered by pipeline or ship/barge. Sales of petroleum products through bulk sales outlets. There are over 1. for example. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. Sales to spot buyers at posted rack price. using delivery tank trucks.

municipal taxes. the tax content of the petroleum price is essentially a pre-determined.6 cents per litre (Canada 1996 10-city average).Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. regardless of market conditions. The petroleum industry acts as a collector of these taxes. or roughly 50 per cent of the pump price. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. If the pump price decreases for example.3 in Quebec) drop in the tax content. in a small number of markets. stable amount. would include a roughly 0. typically made up of: • • • • a ten cent per litre federal excise tax. As part C of this study shows. MJ ERVIN & ASSOCIATES 14 . 1 Due to the application of GST (and in Quebec. for example. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. A three-cent drop in pump price. tax content does fluctuate somewhat with pump price changes. Table 2 shows the provincial tax content for retail gasoline. PST). the tax content of retail gasoline in Canada has increased steadily over several years. and seven percent GST. which amount to 28.2 cent (0. provincial sales tax.

0 16. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave. plus a 6.4 3.6 3.5 cents and 4.6 3.0 15.6 3.0 10.0 28.7 18.0 10.0 3.3 Federal Excise Tax 10.9 3.0 27.3 27.5 12.0 10.3 20.3 10. Provincial Tax 11.7 30.8 4.5 6.0 3.6 3.0 10.5 Total Tax 24.Table 2: Taxes on Regular Gasoline on December 31.0 10.0 4.0 9.5 14.0 10.7 13.7 3.0 10.0 10.0 14.2 10.0 10.6 25.2 cent per litre pump tax.0 cents is charged in the greater Victoria and Vancouver areas respectively.0 10.2 24. MJ ERVIN & ASSOCIATES 15 .0 GST content (7% of pump) 3.1 32. An additional pump tax of 1.5 cents was introduced in the Montreal and surrounding area in 1996. All Quebec gasoline sales are subject to a 15.6 22.1 25.8 note 1 note 2 An additional tax of 1.5 3.0 28.0 10.2 24.0 10.5% sales tax applied to the GST-inclusive pump price.0 11. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.

3 cents per litre.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. namely the dealer’s costs and income. Figure 2: 1996 Average Prices/Margins . MJ ERVIN & ASSOCIATES 16 . was available for product marketing operations. some profit return for the shareholder.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. including retail outlet distribution. the brand supplier’s costs.1 cents per litre.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. 3. and the retail gasoline sub-sector in particular.5 cents per litre (after freight cost).8 ¢ TAX 28. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).3 percent of the average regular gasoline posted pump price. Upstream operations realized 19.6 cents per litre. or 50. or 34 percent of the pump price. to derive a representative value for regular gasoline gross product margin in Canada. It also provides an overview of the industry in terms of several infrastructure parameters.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry.5 ¢ 0. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. this section provides a view of the Canadian petroleum marketing sector.2 ¢ 24.4 ¢ 19.1 ¢ 5. or 9 percent. and potentially. and ancillary operations.3 ¢ 28. This 1 Prices and margins reflect a Canadian 10 city average. Refiner operations realized 5. operating modes. The residual. based on regular unleaded gasoline.

the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. is the second of two elements of the downstream oil industry.3 cents per litre. three key findings can be stated: Finding 4: Finding 5: In 1996. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. See page 10 for further explanation. In 1996. which in the case of retail gasoline. As the product leaves the refinery plant. or “rack to retail” margin. Bloomberg rack price values were used as the assumed wholesale price.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. and it is depicted in Figure 1 as a fixed cost element. and is then transported to the retail outlet. was 5. for example) is sold/transferred at the current rack or transfer price. Freight MJ ERVIN & ASSOCIATES 17 . The marketing sector then. was 3. Based on the 1996 data. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. this is seen as a “non-core” business. Although many petroleum marketers conduct their own freight operations. Freight cost does not typically fluctuate. as part C will describe. Both refiner and marketing margins have been in decline over the past several years. and rack price. petroleum taxes accounted for 50. is defined by the marketdriven price points of ex-tax pump price. and is often out-sourced to third-party common carriers. The gross marketing margin. is usually the gas station. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. it falls into the domain of the marketing sector. In 1996. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work.3 percent of the average urban price of regular gasoline in Canada. the finished product (gasoline.5 cents per litre. In referring to marketing margins and product margins.

This is a particularly useful measurement in comparing retail gasoline markets.000 per outlet. as it excludes the “outside variables” of tax.6¢ Refiner Operations 5. incur a variety of costs. As represented in Figure 3. as it represents 80% of all retail gasoline sales. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. an average gross product margin for regular gasoline in a major Canadian city was 3. but at an average cost of over $200. typical of any retail business. freight. • Product sales: Within this domain.5 cents per litre in 1996. storing and dispensing a product such as gasoline adds considerably to the operating cost. Figure 3: 1996 Average Regular Gasoline Margins (56. and upstream/refiner margins.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. and is therefore a poor comparative tool. Unlike most other retail enterprises however. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. rural markets experience higher pump prices than do larger centres. Gross product margin is therefore defined as gross marketing margin less freight cost. together with gas station dealers.costs are generally less than one-half cent per litre in most major Canadian cities. Posted pump price includes all of these variables. petroleum marketers. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL).8¢ Pump Price) Upstream Operations 19.3¢ 3.1¢ Tax 28.5¢ Product Operations Freight 0. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 . which are typically close to a wholesale rack point.

seasonal blends. as gas stations proliferated. one must ask how marketers compete. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. 1960) MJ ERVIN & ASSOCIATES 19 . and accordingly. etc. expanded product/services offerings such as convenience items. Higher octane grades are more expensive than RUL. additives. but in 1995 was typically 5 cents per litre for midgrade. marketers compete for the consumer’s choice of transportation energy (for example. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. This study does not examine such a broad issue however. p. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. RUL prices are therefore most often cited when relating historical price trends. competitive activity can be observed when a marketer alters one or more of the variables at their disposal.retail gasoline sales respectively1. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. 4th Ed. Environmental concerns and associated costs have dictated greater selectivity in developing new sites.: Richard D. In order to measure competitiveness. The grade differential varies somewhat from city to city. Jerome McCarthy. propane vs. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. gasoline). Simply put. rather than the most places. Although revenue from this product is factored into the study market economics in Part D. Place. Basic Marketing: A Managerial Approach. a number of factors preclude this type of strategy. will ultimately purchase based on price. competitive strategy of this type focuses heavily on selecting the best place. • Product In the past decade. Price. marketers have attempted with some success to differentiate their product offerings from other brands. Place Typically. Irving. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Price competition has forced marketers to optimize outlet revenue.” or four P’s: Product. or when comparing price levels between markets. page 24). Today. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity.44 (1st Dec. 2 E. and 9 cents per litre for premium gasoline. but most consumers view gasoline as a commodity. (Homewood. marketers compete to be represented in as many and/or the best locations as possible. and the price difference between these grades and the RUL price is referred to as the grade differential.. commonly known as the “marketing mix2. Ill. Today. 1 Diesel is another petroleum product sold at many retail outlets. it represents a very small percentage of total retail petroleum sales.). and Promotion. 1971). A portion of the market certainly responds to this type of competitive strategy.

and more importantly. MJ ERVIN & ASSOCIATES 20 . In this context. gasoline is a commodity.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. probably due to its relatively high cost. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. Examples are: • prominently displayed prices . fluctuating pump prices are a significant indicator of robust competition among marketers. At its extreme. This study presents an extensive historical and comparative analysis of pump prices. low prices and/or margins.while uniform pump prices are sometimes cited as evidence of industry collusion. Promotion In the gasoline retailing sub-sector. As such. Consequently. Establishing an objective measurement of price as a competitiveness indicator however. price has proven to be the most widely used competitive tool by gasoline marketers. and therefore “trades” within a relatively narrow price range. and due to the already slim margins available to marketers. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. is less clear.• • closure of non-viable outlets. gasoline is viewed by consumers as a commodity uniform in quality and widely available. • Price In most markets. free item with purchase or special price item with purchase. caused by price competition. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. Examples of promotional competition are: • • • brand identity gasoline discount coupon. this study examines the dynamics of price competition in considerable detail. • • • While examples of all of these indicators are abundantly in evidence. volatile prices . their subsector margins. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. due to the largely commodity nature of petroleum product.contrary to some public perception. volatile pricing manifests itself in the form of a price war (see below). uniform prices . Promotional activity seems to have decreased in the past few years.

or when prices rise or fall apparently in unison. competitors will likely match this price. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. the wholesale rack price. facilitated through street price signs. While this support may take one of several forms. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. since there is no “dealer margin”. If the posted price increase is too high. its effect is to restore some measure of the dealer margin. In the case of lessee or independent dealers however. since they too must restore their gross product margins to sustainable levels. bypassing the higherpriced outlet. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other.where the ex-tax pump price is equal to. but to competitors. assuming that the rack price is unchanged. 1 This does not occur at company operated or commission outlets. in an attempt to gain market share. When this occurs. one must adopt the perspectives of both consumers and competing. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. the relationship between the supplier and dealer is generally as described on page 25. Whether through falling pump prices or rising rack prices. The other dealer has little choice but to quickly match. If one dealer decides to reduce pump prices (by two cents. adjacent dealers. in order to maintain a reasonable market share. Price Support In times of “normal” pump prices. who then react quickly to the change. or even being squeezed to zero . the supplier may temporarily intervene. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. Pump prices therefore tend to move uniformly within a very short time. MJ ERVIN & ASSOCIATES 21 . There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. and provide to the dealer what is commonly referred to as price support. competitors may not follow. The effect of this upon the gross marketing margin is obvious: it is squeezed. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. the effect on many consumers is immediate: they will drive into that station. Finding 7: Price uniformity and price volatility. are indicators of a competitive market. Pump price signs are an ubiquitous feature of the retail gasoline industry. To understand the phenomenon of uniform pump prices. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. or even undercut the competitor’s lower price.When pump prices are uniform. for example). This is a misconception. obviously at the expense of the supplier margin. or even less than.

is beyond this study’s scope. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. While this study does not intend to undertake a detailed review of the effect of the Act. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. An examination of the effect of the Competition Act. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. In addition. however. Following a year-long investigation. which is administered by the federal Competition Bureau (Industry Canada). A review of historical retail pump prices in the Halifax. the petroleum marketing sector has been the subject of several inquiries at federal. or of direct government intervention in marketing. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. More recently. but reverts back to the dealer when the support arrangement is ceased. and a brief discussion of this case appears in part D. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. resulting in 9 convictions. provincial and even municipal levels. control over retail pump price effectively reverts to the supplier. the Bureau found that there was no evidence to support these allegations1. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. 1997 MJ ERVIN & ASSOCIATES 22 . There are few current examples of direct government intervention in the pricing of petroleum products. In addition. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. Nova Scotia market may provide an example of the potential negative consequences of direct intervention.Under the provisions of some price support mechanisms. These cases have largely involved local dealers and/or isolated incidents.

Many smaller retail owner-operators. it is the single largest one. or inhibiting. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. higher pump prices. as outlined above. it is clear that government policy plays an important role in facilitating. The high cost of building a modern retail gasoline outlet for example. inhibit competition. creating a need for higher margins. exit from an non-viable market. These regulations clearly exist to the benefit of all. A practice. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. Retail gasoline sales. a competitive climate. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). is in part. but exist to meet other important societal needs. sales of gasoline through the roughly 16. As a product group however. This issue is discussed more fully in part D. It is important to acknowledge that many regulations affecting the retail gasoline industry. and consequently. or incentive for. promotes or limits market-driven pump prices. to some degree. particularly in smaller population centres. one can cite examples of regulatory obstacles to exit from the retail gasoline market. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. accounting for 41% of all petroleum demand. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. entry into an attractive market. or incentive for.500 retail gasoline outlets across Canada. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. creates an obstacle to. Conversely. So defined. and at least some of this capital cost is regulatory compliance-driven. accounts for about 37% of all refined petroleum demand in Canada. in the form of standards for the decommissioning of retail petroleum sites. for safety and environmental protection. and is the single largest market for gasoline products. accounting for roughly 88% of all gasoline demand. MJ ERVIN & ASSOCIATES 23 . policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. that is.

Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6. This study provides an estimate of the actual retail outlet population.9% Diesel Fuel 22.2% Propane /Butane 2.2% Asphalt/Coke 4.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.9% PetroChem Feedstocks 5. Figure 5: Canadian Retail Outlet Population . as shown in Figure 5.7% Light/Heavy FuelOils 14.it has no practical means to enumerate each and every outlet.3% Total Sales Volume: 84. This survey accounts only for major established retail networks .2% Retail Gasoline 37.7% Lube/Grease 1.6% Other Gasoline 4.2% Other 0.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .

and this is of some importance with respect to the matter of prices and competition in this sector. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . Distribution of these outlets by province (Figure 6. There are two main stakeholders involved in the marketing of retail gasoline: the supplier.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. the retail outlet is owned and operated entirely by the product supplier.The estimated number of retail outlets in Canada has declined from 22.000 outlets in 1989. Several possible relationships. The supplier. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. who holds initial title to the refined petroleum as it leaves the rack point.500 in 1995. exist between retail dealers and their suppliers. and all inventory and revenues belong to the supplier. to about 16. and the dealer. as owner of the product. and usually owns the brand name seen at the retail outlet. or modes. controls the setting of the pump price. using Octane counts only) is roughly equivalent to population densities. as one might expect. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. who manages the day-to-day operations at the retail outlet. The principal dealer and attendants are salaried employees of the supplier.

sub-component margins . The “dealer” is in essence. and pays them from his commission revenue. Control of Pump Price Dealer Compensation supplier a commission from the supplier. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. supplier salary from supplier. the supplier retains control of the retail pump price. the outlet facilities and petroleum inventory is owned by the supplier. who pays all outlet operating costs. based on pump sales volume. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. an employee of the supplier supplier supplier typically the dealer. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 .the entire gross product margin accrues to the brand supplier. The dealer in turn hires attendants. usually based on cents per litre of petroleum sales. Since the supplier owns the petroleum product at this type of outlet. but the outlet operator (“dealer”) is compensated by a commission payment.

Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. the retail facilities are owned by the dealer. dealer-established retail price. and in turn resells to the motorist consumer at a higher pump price established by the lessee. MJ ERVIN & ASSOCIATES 27 . can vary considerably from one supplier to another. since it is predicated on contractual arrangements between the dealer and the supplier. This Dealer Price. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. and means of compensation supplier. less the Dealer (wholesale) Price charged by the brand supplier. unlike rack or pump prices. not the supplier. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher.product from the supplier at a “Dealer Wholesale” price. The margin between these two prices is the dealer’s gross revenue. and sells at the posted pump price. The dealer pays most or all of the expenses associated with operating the outlet. The margin between these two prices is the dealer’s gross revenue. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. This dealer margin is defined as the pump price (ex-tax). and sells at the posted pump price. and has control over the retail pump price.

It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. or Imperial Oil). and fully two-thirds operate as lessees or independents. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. who themselves establish pump prices. In addition. 1 Unless the dealer is under a price support arrangement (for instance. MJ ERVIN & ASSOCIATES 28 . The remainder represent one of over 50 different marketer organizations. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. during a price war) as previously described. some general figures are mentioned here.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. Petro-Canada. virtually none of the major integrated outlets are company operated. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace.

5 million litres. has had a profound effect on the retail gasoline marketing sector. Improved outlet revenue from ancillary operations has caused. reduced petroleum margins. ancillary service has had the consequence of subsidizing the pump price of gasoline.While an average outlet throughput may be in the order of 2. average annual throughputs ranged from under 1 million litres in smaller population centres. Many outlets have more than one ancillary offering: many “flagship” outlets for example. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. which in part has led to a reduction in retail product margins. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. Based on a sampling of outlets surveyed in this study. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . In fact. Canadian throughputs have dramatically improved in the past several years . These improved outlet throughputs have provided for improved petroleum revenue potential. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. these study findings show that this can vary widely from market to market.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. and is a result of. Figure 8 depicts the Canadian representation of several key ancillary services. feature both a large-area convenience food store and a modern car wash facility. to over five million litres in major markets such as Toronto. In effect. Most ancillary services are operated by the dealer/lessee. more fully described in part C.

when the Persian Gulf War caused crude prices to increase significantly. prices are for regular unleaded (RUL) gasoline. mainly using Canada average values. as can be seen in part D of this study. MJ ERVIN & ASSOCIATES 30 . in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. including smaller markets. While some of the presented findings are selfexplanatory. particularly around 1990. Unless noted. An “all markets” average. As such. using a Canada 10city weighted (by provincial demand) average. Regional and market-to-market comparisons are presented in greater detail in part D. many utilize terms which are explained in part A. the “Canada average” price reflects an average of urban markets only1. would be somewhat higher. Since rising prices are common to most consumer goods and services. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. This shows that pump prices have increased in nominal terms.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. This part examines broad trends in several areas. an examination of the specific historical record of gasoline prices is useful. and with which the reader should be familiar. Since 1 Data is not regularly collected on smaller markets.

In constant dollars. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995.1990. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. Figure 10: CPI Index Comparison . When pump prices are reduced by the amount of tax content. as defined in part A of this study. rack price. It also depicts the associated margins.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. retail pump prices were about 7 cents less in 1995 than they were in 1986. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. MJ ERVIN & ASSOCIATES 31 . nominal pump prices decreased. as in Figure 10. ex-tax equivalent prices. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). When compared to other consumer goods. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. and relative crude cost.

which are defined by the price points.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. Figure 12 shows that industry margins have not been constant over time. nor do rack prices exactly follow crude costs. it is also useful to examine the behavior of margins. MJ ERVIN & ASSOCIATES 32 . and the rise in the tax content. and have risen slightly since 1994. due to additional market factors which affect pump and rack prices at any given point in time. In fact. It is important to state that pump price changes do not occur in exact lock-step with rack prices. as shown in Figure 12. Margin History While Figure 11 provides an indication of key price trends. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. then one might expect margins to be quite constant over time. the presence of these additional market factors have operated to the benefit of consumers. as the next section shows. are principally a reflection of changes in the underlying price of crude oil. and in fact have displayed a declining trend over the past six years. as Figure 11 shows. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. which in turn. If. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. the downstream industry operates on a “cost-plus” basis. it simply passes on a fixed cost margin to determine the “correct” pump price. as might be suggested. that is.

This shows that on a monthly basis. several factors. and has been a result of.crude) 5¢ Marketing Margin (retail .rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. not weekly or daily data. Finding 13: From 1991 to 1996. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. In particular. MJ ERVIN & ASSOCIATES 33 . emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. the actual fluctuation is much more pronounced than shown. 1 In fact. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. as local competitive factors act to self-regulate pump prices. since the chart is based on monthly averages. this upward trend is not attributable to “downstream” refiner or marketing sector margins. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. which have both shown a consistent decline throughout the period 1991 to 1996. compared to the Canadian average. A more thorough discussion of specific market factors for these and other centres appears in part D. the gross marketing margin can fluctuate quite significantly1. The decline in refiner and marketing margins has both resulted in. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.

Canadian pump prices have been roughly equal to. US Price History The retail gasoline tax structure in Canada is vastly different than the US. is presented in Figure 14. This difference accounts for most. resulting in significantly higher Canadian gasoline prices. On an ex-tax basis. this is wholly attributable to the difference in taxation. US pump prices. although Canadian pump prices in urban markets are clearly higher than in the US. for several years.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. This shows that. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . A comparison of Canadian and US regular gasoline pump prices.Figure 13: Monthly Gross Marketing Margins. if not all of the difference in pump prices between Canada and the US. with and without tax. or even less than.

there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . behave in a very similar fashion. largely as a result of two factors: • Canadian marketing margins have decreased in this period. Prior to 1994. which is reflected in US average pump prices. when compared on an ex-tax basis. RFG has not been introduced to Canadian markets. page 24) and somewhat increased demand. From this it can be seen that Canadian and US rack prices. This is no longer the case however. trading at any given time within a relatively narrow (about 2 cents per litre) range. While these trends have also occurred in the US. • Although this study shows that on an ex-tax basis.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. Figure 15 compares these values for selected Canadian and US centres over a period of several years. as a result of outlet closures (see Figure 5. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. Canadian outlet throughputs (although likely still less than those of the US). Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. have improved considerably. and moving up or down more or less in unison. Canadian ex-tax pump prices were historically somewhat higher than in the US. This would be a useful area for further research. both a cause and an effect of improved throughputs and ancillary revenues as previously described.

or indeed anywhere. rising and falling closely in step with demand. or sales. not only in a given market.000 2.700. conditions begin to favour a “seller’s market”. and prices tend to fall.000 2. the price tends to be bid upwards. compared to average ex-tax regular gasoline pump price for the same period. and as would be expected in any commodities market under these conditions.000 2.000 24¢ 1.100.500.000 1. and falling in the latter half of each year. of motor gasolines from 1991 to 1996.900.100.000 2. Yet in the latter half of each year. Gasoline demand exhibits a very regular seasonal pattern. Gasoline price exhibits a similar. Figure 16: Monthly Demand vs. Demand vs. a “buyers market” develops. as demand ebbs and inventory improves. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .000 1. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories. albeit less distinct pattern. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.900.000 34¢ 2. As non-refiner marketers attempt to secure a supply of this diminishing inventory.700.500. but in fact across the North American continent (US demand follows a similar pattern). Price History Figure 16 shows the history of Canadian gasoline demand. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets. Simply put. Pump Price (nominal ¢/litre) 3. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. increasing significantly every spring.300.

and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. gasoline prices have not followed the traditional model. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis.3%. the downstream petroleum industry. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.Whether in the spring or the fall. while world crude prices and Canadian taxes have generally increased over the past several years. pump prices have increased due to a significant rise in crude costs in this period). All of the findings suggest that. which ensures a competitive product price for buyer and seller alike. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. This part of the study presented a number of historical views of retail gasoline prices. competing to meet their own needs. their related product costs and margins. The traditional supply-demand model predicts that when demand rises. MJ ERVIN & ASSOCIATES 37 . and product taxes which add to the consumer price of gasoline. despite a rise in demand. which consists of the refiners and marketers of gasoline and other petroleum products. has operated in a highly competitive environment. as evidenced by declining industry margins. in that prices have fallen. while average ex-tax pump price declined by 14% (since 1994. demand rose approximately 8. so do prices. Figure 16 shows that from 1991 to 1995. the essence of a free market economy. a feature of most marketregulated commerce. On a long-term basis however. This is of course.

but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. MJ ERVIN & ASSOCIATES 38 . is useful in providing broad overviews of industry price and margin trends. outlet volumes. there is no regular monitoring of pump prices in smaller centres. and in order to provide insights into the range of competitive dynamics that may exist. outlet costs. ancillary revenues. and pump prices alone provide very little opportunity for “comparability”. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. freight. These “outside factors” tend to obscure the more relevant aspect of pump price. play a role in a market’s pump price. although one was subsequently dropped due to insufficient submitted data. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Nineteen markets were therefore adopted for the study (Table 3).Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. A number of factors such as taxes. etc. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. • Methodology Selection of Markets A number of markets were selected for the study. namely product margin.. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and a more detailed examination of price.

In all. Suncor Inc. Petro-Canada. the gross marketing margin must be examined in isolation from those other variables. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. it was essential to obtain data not normally available through existing public sources.0001. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. Ontario. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. the gross marketing 1 Although White Rock is clearly not a major centre by itself. these organizations provided market-level data on freight costs.and consequently competitiveness . its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. To this end.Each market was classified according to regional affiliation (BC/Prairie. but a number of variables. and Group B markets less than 500. price history data not available through public sources. Furthermore. Five companies responded to this request: Imperial Oil. and for smaller markets. To examine the competitiveness of the marketing. MJ ERVIN & ASSOCIATES 39 . retail outlet and brand representation.are influenced not by one. Process Overview As illustrated in part A. 2 Depending upon the outlet mode.. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. and Canadian Tire Petroleum.000. In addition. Shell Canada. or “rack to retail” sector. retail pump prices .

as the “blended” price includes other product grades. tax content. average pump prices are higher than actual average regular gasoline prices. a market-by-market profile of outlet income is presented. rack price. Group B (smaller market) and 19-market study averages. Where applicable. The gross product margin thus serves as an interim basis for comparing study markets. Finally. in addition to operating cost and ancillary revenue data gathered in the study1. rack price. 1 Although outlet cost and ancillary revenue data was not available for all markets. Using the derived gross product margins and volumes for each market. From participant company supplied data. to derive the 1995 average gross product margin for each of the study markets. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban).margin is stripped of its freight component. 2 Accordingly. and freight were successively removed from the pump price. 1995 average values were determined for pump price. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. weighted by sales demand. a broad representation of markets was possible. average outlet annual throughput was determined for each market. including some smaller centres. 2. to arrive at “blended” values2. and the final “rationalized” gross product margin was determined for each market. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. Where differences in gross product margin might still exist. by product grade. 3. MJ ERVIN & ASSOCIATES 40 . and freight. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. This allows for an accurate determination of net outlet revenue. For each market. The variables of tax content. these were weighted by volume.

or consolidated net incomes.4. also considering that RUL constitutes the majority of product. A dollar-per-outlet estimate of these elements was made. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. 6. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. . but they are relatively minor. From participant company data. When these margins are applied to outlet throughputs as in step 4 above. This value was then applied to the gross product margin to determine average outlet petroleum revenue. Supplier Overhead costs. 5. Interpretation of Data In some smaller centres. 7. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. accurate comparisons are possible. as described on page 10. the effect on the “blended price” is small. petroleum revenues. Bloomberg rack price values were used as the assumed wholesale price. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain... The derived weighted average values of pump price. it is important to understand that the use of rack price in this analysis has certain implications. and from one brand to another. so that on a cents-per-litre basis.7 million. perhaps by 1 to 2 cents per litre. and therefore where assumptions were made. In referring to marketing margins. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. average revenues from ancillary services were added. This variation is constant across all nineteen markets however. represent a broad range of markets. product margins. These differentials do vary from one market to another. encompassing a significant portion of the entire Canadian market. objective data exist for both of these values. and supplier profit.. including relatively smaller ones such as Sioux Lookout or Gaspé. MJ ERVIN & ASSOCIATES 41 . and gross product margins are therefore likely to be understated. grade differentials were based on known differentials of nearby markets. many wholesale petroleum purchases are made at less than the “posted” rack price...to determine average consolidated net revenue per outlet. and outlet operating costs were deducted from total revenue. Wholesale refined product prices used in this study are therefore likely to be overstated. and accordingly represent a broad spectrum of consumers and marketers. freight. marketing margin. Also. etc. these 19 markets represent a combined population base of 8. While clear. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. a recognized source of data on world crude oil and petroleum markets and prices. Unlike retail pump prices however.

Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. MJ ERVIN & ASSOCIATES 42 . The data shows a statistical pump price variance of over 17 cents per litre within this study group. higher priced markets are associated with smaller population centres.64 cents per litre in pump price. table J for an explanation of how variance is derived. A 6. The study data suggests that variations in tax rates account for a significant part of pump price differences.38 cents per litre in ex-tax pump price.Rack prices used in this study are nevertheless market-driven. independently gathered data. The first of these variables to be examined is tax. The data also shows that typically. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. but a variance of only 12. while lower prices tended to prevail in major centres. The 19-market study group exhibited a statistical variance1 of 17. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist.8 cent difference in pump price 1 See footnote at Appendix II. broken into tax and extax components. Tax Figure 19 shows posted pump prices for the study markets. and based on objective. accurate. there is little to suggest why such a high variance exists.

thus providing a better basis for comparison. provincial tax rates can vary greatly. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. namely the upstream industry and refiner sector. This eliminates any effect that tax variability may have.while all markets are subject to the same rate of federal excise tax and GST1. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry.tax.less than one-half cent per litre. accounting for roughly half of the average retail price. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. MJ ERVIN & ASSOCIATES 43 . ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. it is therefore more useful to use ex-tax pump prices when comparing any two markets.between Calgary and Vancouver for example. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. but the variance is minimal .75 cents per litre (Vancouver. while taxation between provinces is more pronounced . or when examining historical price trends. Montreal). As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. as described in part A. was less than three cents. additional elements of the revenue stream must be further isolated. In all study markets. when examined on an ex-tax basis. 1 Due to pump price differences. taxes were a significant element of pump price. Figure 19: Pump Price . GST content can vary by market. The data shows that taxation between markets within the same province varies little.

MJ ERVIN & ASSOCIATES Cents per litre 44 . as this would cause rack buyers to bring product in from the lower-priced region . the rack price is equivalent to the upstream margin plus the refiner’s margin. the validity of analyzing gross marketing margins in isolation might be raised. one region cannot maintain rack prices at a higher level than another. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. reflecting some differences in refinery crude acquisition costs. rack and pump prices. To address this. differ little from those of major centres. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. in the case of Thompson).assuming transport costs did not outweigh the price difference. When rack price is deducted from the ex-tax pump price. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. are clearly delineated by market-driven crude. if a clear understanding is to be achieved. as is examined below. but ultimately. rack price) and gross marketing margin elements. it should be restated that each of these sectors. reflecting the reality that at the rack level of competition. Freight costs are additional. and their respective margins. and therefore are best analyzed separately. the rack price is set at the rack point (Winnipeg. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. Furthermore. This is due to the fact that for any market. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie.

remote population centres. the data shows that freight is often a significant part of the gross marketing margin. and therefore a significant pump price factor. as low as 0. generally smaller markets.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. For markets which are also established as rack points.0 cents per litre. it is therefore important to eliminate the freight variable from the gross marketing margin. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. particularly in comparisons of major urban markets to small. Figure 21 shows a study market comparison of gross marketing margins. Although freight operations are often an integral part of many petroleum marketing operations. with their component freight costs. Before using this as an analytical tool however. it is essentially a “non-core” business.49 cents per litre (gross product margin). Two of the study markets had freight costs in excess of 3. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. this freight cost is almost negligible. in fact. To provide a comparative view of the marketing dynamics within the study group. MJ ERVIN & ASSOCIATES 45 . one final outside variable must be isolated: that of product freight. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13.16 cents per litre (gross marketing margin) to 7. For other. resulting in comparative gross product margins.3 cents per litre. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies.

as the 3. MJ ERVIN & ASSOCIATES 46 . to the resultant retail gross product margin . was the lowest.42 cents per litre. while Group B markets averaged 7.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. A 7. was the highest of the study group.5 cent variance in gross product margin is still significant however. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. In referring to marketing margins.68 cents per litre. product margins.5 cent per litre average relates to regular gasoline in major markets. petroleum revenues.95 cents per litre. or consolidated net incomes.22 cents per litre Smaller markets showed a wider variance in gross product margin . Gaspé.6.a variance of only 2. The study revealed that: • • Retail gross product margins differ very little between major urban markets . while Toronto.5 cents per litre average Gross Product Margin cited in Part B.17 cents per litre.68 cents per litre1. 1995 gross product margin averaged 5.06 cents per litre. Group A (larger population) markets averaged 5. or between any two regions.6 cents) to the variance in their component gross product margins (7. Bloomberg rack price values were used as the assumed wholesale price. For all study markets. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.5 cents). at 14. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.the gross revenue available to the petroleum marketing sector for its operations. at 3. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.

sold significantly less than 5 million litres of petroleum per year.differences between markets. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.14.1 cents per litre in Toronto.000. Indeed. 3. for example. If these two factors are related to each other as they are in Figure 24. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 . vs.000. once isolating retail gross product margin from all of the “outside” pump price factors.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000 2.2 cents per litre in Gaspé. A wide range of volume performance is evident. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. a wide range of variability still exists between markets in the study group .000 Litres 3.000 litres per year (Toronto). an examination of related outlet throughput volumes is necessary. it would likely be so unprofitable as to be un-viable.000.000 5. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000.000 litres per year (Sioux Lookout) to over 5. Figure 23: Average Annual Throughput per Outlet 6.000 1.000. To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000. if any retail gasoline outlet located in the Toronto area for example. ranging from under 700.000.000 4.

000 2.6624 1. while those with high Gross Product Margins tend to have low outlet throughputs.4 million litres annually. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000 Volume (litres) 4. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes. it follows that higher gross product margins will be the consequence.000. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. all market groups (BC/Prairie.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.000 6.000 5. As most outlet operating cost are fixed in nature . the Group A market outlets had roughly 50% more throughput than Group B outlets .000 3. On average however.000. Smaller markets perform as competitively as larger centres.000. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.that is.000. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.000.Figure 24: Outlet Volume vs. With few exceptions. compared to 2. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet.6634Ln(x) + 76.7 million respectively. If all outlets in a given market experience generally low throughputs.000. they remain essentially the same regardless of volume changes .962 R2 = 0.95 cents). Regionally. Ontario. not of poor competition.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.42 cents) than smaller (Group B) population centres (7. Although MJ ERVIN & ASSOCIATES 48 .

which. two additional factors are introduced: ancillary revenue and outlet operating costs. supplement their incomes with other revenues. and ultimately shows that very little difference in competitiveness exists between any two markets.000 5. in addition to petroleum sales. and incur many expenses in the course of their commerce. however. Figure 26 summarizes total outlet petroleum sales. while operating costs are those costs which are directly incurred in the operation of the retail facility.000. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise).000 4. which for the study group. and the resultant consolidated net revenue. and supplier MJ ERVIN & ASSOCIATES 49 . and must be examined. outlet-based view of retail markets.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. product cost. such as convenience stores.000.000. competitiveness occurs between retail outlets.000 3. Ancillary revenues are those derived from non-petroleum sales sources.000. averaged $69. In reality. this is likely due to the higher incidence of Group B study markets within this region. less outlet costs. Gross product margin. Consolidated Net Revenue per Outlet To create a complete. car wash. It represents the residual revenue which is available to the dealer and to the supplier. as described below. These additional factors clearly have an effect on the relative competitiveness of retail markets.the revenue available for dealer income.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. ancillary sales. and auto service.000 2.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. supplier overhead costs.000.716 . Figure 25: Outlet / Volume Relationship .000.000 6. is only a measure of petroleum revenue per litre.

petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. A discussion of the ultimate distribution of this revenue is useful.000) $(300.000 $150.000) $(250. and his personal labour investment. As described above. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . In effect. Costs.000 $50. Most markets showed relatively similar net revenues (see Appendix II. MJ ERVIN & ASSOCIATES 50 . reduced pump prices.000) $(350. Income BC/PR $300. which reflects his investment in the outlet.000 vs. An examination of these component elements reveals a significant finding: that for most markets. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.$154. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. causing the weighted average for Quebec / Atlantic to be depressed).000 $200.000 per year respectively . Figure 26: Outlet Revenues. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier. as explained below. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. $60. these ancillary operations contributed to a lower product margin and consequently.000) $(100.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.profits. Finding 19: Based on published rack prices.000) $(150.Group B outlets were not as profitable as these revenue values might suggest.000 $100. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000) $(200. Table K).000 $250.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

MJ ERVIN & ASSOCIATES

51

Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

MJ ERVIN & ASSOCIATES

52

Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

MJ ERVIN & ASSOCIATES

53

this market has access to numerous refiners along the Pacific coast through marine supply.542.98 ¢ 0. contributing to a higher than average pump price. while average throughput ranked 4th. as described below.38 ¢ 7. Geographic / Supply / Freight cost considerations: As a port city. Figure 28: Vancouver . and also has local refining capacity.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.000 1.968 litres 7. net outlet revenues were less than those of other major centres.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . Influence of other markets: Although relatively close to the US border. a 60.Vancouver population # of brands # of outlets outlets per 10. ranking 11th. Low consolidated net revenues may have contributed to the higher margin.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.000 barrel per day plant located in the greater Vancouver area. but well within a cluster of markets with similar throughputs. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. Vancouver is also a terminal for a refined products pipeline from Edmonton. Overall.ex tax Canada Average .745 18 446 2. Vancouver provides several perspectives into retail marketing. The somewhat high margin placed this market slightly above.658. This may explain the somewhat elevated gross product margin in this market.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. and with access to wholesale product by several means. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. Vancouver collects a 4 cent per litre municipal tax.

this market is subject to a 4 cent per litre municipal tax.315 4 8 4. or competitive dynamics.98 ¢ 0. Freight costs were accordingly low compared to other small markets in this study. This is likely due to the fact that unlike many smaller markets. adjacent to the United States border. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. White Rock is essentially part of a major market due to its proximity to Vancouver. In all respects. prices in this market have historically mirrored those of Vancouver. This suggests that.000 16. Average outlet throughputs were relatively high.White Rock population # of brands # of outlets outlets per 10. but less than most markets with a small population base. the study data found little to suggest a material effect upon representation. This market is close to its usual rack point. Geographic / Supply / Freight cost considerations:. Price history / Taxation: Although no specific data is available. MJ ERVIN & ASSOCIATES 55 . gasoline “cross-border shopping” is less pronounced than might be expected. White Rock’s margin was typical of markets with similar outlet throughputs. and retail gross product margin was less than that of markets with a similar population base. thus providing some unique characteristics for the market study. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Like Vancouver. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. at least in this market. due to its proximity to one.604. Influence of other markets: Although this market is a border-crossing community.630 litres 7.45 ¢ 7. Despite its relatively small size.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Vancouver. the White Rock retail gasoline market displayed the same attributes as a major urban market. prices.

24 ¢ 6.47 ¢ 0.675 27 313 4. indicative of a strong competitive climate.719 litres 6. Product is usually sourced from Edmonton refineries via pipeline. pump prices in this market have historically been well below the Canadian 10-city average. Figure 29: Calgary .23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada.827. Consolidated net revenue: was typical of other major markets in the study group. Calgary is of sufficient size to support a viable rack market. which was one reason for selecting Calgary as a study market. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Other considerations: Of the markets studied.Calgary population # of brands # of outlets outlets per 10.ex tax Canada Average .000 710. Influence of other markets: Calgary is fairly remote from US and other major markets. Calgary pump prices are very close to the Canadian average. Rack-to-outlet freight costs are among the lowest in the study group. Some smaller markets in the vicinity have occasionally priced below Calgary. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price .4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Price history / Taxation: As the figure below shows.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Calgary had the third highest number of retail brands. Indeed. creating some competitive pressures (see Nanton). Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.

Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. this market is removed from other significant markets.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . it is likely that this reflected a surplus of wholesale inventory within the local market or region.ex tax Canada Average . which are among the highest in Canada. and a history of volatile pump prices.180 15 86 4. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average.21 ¢ 7. This is partly due to provincial taxation levels. Influence of other markets: Like Calgary.Regina population # of brands # of outlets outlets per 10. Since then. Regina was of some interest as a study market. and this market is now more typical of other large population centres. Figure 30: Regina . Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.089.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . supply/demand is likely more balanced. Consolidated net revenue: was typical of other similar markets. Although no supporting data is available.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. price volatility has eased. Since 1993.000 179. margins and throughputs were typical of other markets with a similar population base.794 litres 7. and is therefore a recognized rack pricing point. and therefore experiences no particular influences from any other major market. Ex-tax prices are also above average.50 ¢ 0.

although. prices have tended to stay somewhat above the Canadian average.000 616. although there is no study data to support this. it is an established rack price point.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.790 17 261 4. and therefore experiences no particular influences from any other major market. Price history / Taxation: In the early 1990’s this market experienced some price war activity. Consolidated net revenue: No ancillary or outlet cost data was available for this market. This may reflect a lower than average Consolidated Net Income. and has remained very close to the Canadian 10-city average.06 ¢ 0. possibly due to modest ancillary revenue.ex tax Canada Average .84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. On an ex-tax basis.22 ¢ 7. Since then.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. though somewhat higher than average ex-tax pump prices. Influence of other markets: Like Calgary. this market has exhibited relatively stable pricing. Figure 31: Winnipeg .265. probably related to a regional surplus of wholesale inventory (see Regina). like most markets of this population density.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs.Winnipeg population # of brands # of outlets outlets per 10. this market is removed from other significant markets.217 litres 8.

placing Nanton well below the expected margin. Unlike many of the smaller markets in this study group. it is likely that low operating costs.585 4 5 31.and a low average outlet throughput. Nanton had a high number of per capita outlets . While these conditions would normally result in a high gross product margin. Nanton was the smallest market in terms of population. Nanton has traditionally priced either at or below Calgary. in terms of expected petroleum revenues. Nanton had the second lowest gross product margin of the study group. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. Nanton appeared to benchmark its pump prices to those of Calgary. as Figure 24 shows. this market has a relatively low freight overhead. Despite its small size. Consolidated net revenue: No Ancillary or cost data was available.600. due to its proximity to one.far in excess of what would be expected of a community with a population of 1.91 ¢ 0. more isolated small-town markets. Nanton was perhaps the least viable market in the study group. while others experience consistently high prices.000 1. would have an offsetting effect. MJ ERVIN & ASSOCIATES 59 . and perhaps healthy ancillary sales associated with highway traffic. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. the Nanton retail gasoline market displayed the same price attributes as a major urban market. Price history / Taxation: In order to attract market share beyond simply the local population. the retail gasoline market in Nanton was not restricted to the local population. Due to its highway location and its proximity to Calgary. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Average outlet throughputs were relatively low. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. In this respect. in order to maintain a share of the considerable potential sales revenue that passes through this market. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack.000 litres 5.the highest of the entire group .51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. although not as low as expected. a feature not available to other.Nanton. situated on a major North-South highway to the United States Among the study group.071. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market .41 ¢ 5.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Influence of other markets:. Alberta population # of brands # of outlets outlets per 10.

6 cents per litre. Geographic / Supply / Freight cost considerations: At 1.45 ¢ 1. MJ ERVIN & ASSOCIATES 60 . Peace River has among the highest freight cost in the study group.157. though fairly typical of many smaller. experiencing relatively high gross product margin and consequently. other markets. further adding to overall high pump prices. its normal rack point.000 6.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. and due to its isolated locale in northern Alberta. Peace River also experiences high freight costs. Alberta population # of brands # of outlets outlets per 10.715 6 8 11. this market has little or no influence upon.Peace River. isolated markets. and in fact fell into a tight cluster of four other study markets.623 litres 12. isolated markets. Supply is via tanker truck from Edmonton. they were comparable to other markets with similar average throughputs.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. high pump prices. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Price history / Taxation: Peace River is typical of small. In contrast to Nanton. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.6 ¢ 10. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. and was accordingly chosen as a study market. nor is it influenced by.

experiencing relatively high gross product margin and consequently. Geographic / Supply / Freight cost considerations: At 3.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. they were comparable to other markets with similar average throughputs.014. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance.975 5 6 4. the community of Thompson clearly falls into the category of a small.1 ¢ 3.000 14. isolated markets. MJ ERVIN & ASSOCIATES 61 .Thompson. Manitoba population # of brands # of outlets outlets per 10. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. further adding to overall high pump prices. a significant portion of which would likely be distributed towards supplier overhead costs. Thompson is faced with the dilemma.520 litres 14. These factors resulted in relatively strong per-outlet net revenues. this market has little or no influence upon.02 ¢ 11. Price history / Taxation: Thompson was typical of small. It also experienced high freight costs.02 cents per litre. Thompson is among the highest freight costs in the study group. nor is it influenced by. and due to its isolated locale in northern Manitoba. remote market. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. outlet costs were also modest typical of most smaller markets. high pump prices. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. resulting in per-outlet petroleum revenues which were quite typical of many markets. Supply is via tanker truck from Winnipeg. Consolidated net revenue: Low outlet throughputs were offset by higher margins.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Although ancillary revenues were the smallest of the study group. and reduced pump prices. Although outlets in Thompson appear to be as competitive as those of any other study market. thereby creating the potential for narrower margins. and in fact fell into a tight cluster of four other study markets. Influence of other markets: Since is not located on a major inter-uban thoroughfare. its usual rack point. Other considerations: Like other small markets. other markets. This however.

On an ex-tax basis however.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . and is also relatively close to wholesale supply sources in the US. Consolidated net revenue: Although no study data was available for this market. thus there exists a climate of robust competition.478 litres 3.000 2. Figure 32: Toronto .098. Influence of other markets: This market is continuously linked with several other major retail markets.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 .06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group.06 cents per litre. stretching from Pickering to Buffalo. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. similar to that of Montreal. Within this region are thousands of retail outlets. as evidenced by an exceptionally low gross product margin. This is likely offset by high operating costs. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. New York.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. it had the second highest brand variety of the study group.775 30 546 2. With an average “blended” gross product margin of only 3.36 ¢ 0. and a resultant low consolidated net revenue. this market ranked first in a number of measures: lowest gross product margin.275. this market was consistently less than the 10-city average. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. In addition.Toronto population # of brands # of outlets outlets per 10.3 ¢ 3. least number of outlets per capita. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. and first in average throughput per outlet. it is likely that outlet ancillary revenues are among the highest in the country. It consequently has a low freight component.extax Toronto Posted Price .

000 678. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point.29 ¢ 5. ancillary revenue was slightly lower than average. rural markets co-exist in this area. and operating costs were higher than most.97 ¢ 0.004. Other considerations: While pump prices in this market were somewhat higher than in Toronto.948 litres 5.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. in fact.145 19 209 3.ex tax Canada Average .Ottawa population # of brands # of outlets outlets per 10.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. some of which have on occasion priced below Ottawa (see Nanton and Calgary). Although petroleum revenues were typical of major markets. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. several smaller. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. exhibiting all of the characteristics of robust competition. Consolidated net revenue: was low.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. and close to the Canadian 10-city average. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . Influence of other markets: Although Ottawa is the only major market in the immediate area. Figure 33: Ottawa . freight costs within this market were quite low. slightly lower that expected.

somewhat isolated. and between 5 to 8 cent per litre in gross product margin.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. This would suggest that a significant market share is being lost across the US border.550 litres 8.475 10 24 2.73 ¢ 1. average throughputs were modest. Pump prices in this market were thus typical of any market with similar throughput characteristics. Sault Ste Marie is a sizable market.Sault Ste Marie population # of brands # of outlets outlets per 10. this Canadian market has some difficulty in remaining both competitive and viable. MJ ERVIN & ASSOCIATES 64 . Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Freight costs are therefore high.465.22 ¢ 7. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. a product of relatively strong net petroleum revenues combined with lower than average operating costs. yet with some potential for cross-border retail competition. Influence of other markets: This market is close to a US border market. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.000 81. partly due to higher freight costs. a consequence of the transport distance from the rack point. and accordingly. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto).51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply.

It therefore presents some unique characteristics for the market study.006 litres in 1995.000 3.96 ¢ 3. MJ ERVIN & ASSOCIATES 65 . was much less than expected for a market of this size. Influence of other markets: This is clearly an isolated market.310 3 3 9. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. This is a major factor in the high cost of gasoline in this market. brands. so that virtually all sales volume represents local demand only. one-seventh the average throughput in Toronto. and outlet throughputs of any market studied. despite its high prices. An average outlet in Sioux Lookout pumped only 694.066 litres 14. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. Sioux Lookout is well-removed from any major highway.Sioux Lookout population # of brands # of outlets outlets per 10.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. Consolidated net revenue: No data was available for this market. largely due to higher freight costs. this market experiences a high degree of price competition. although high.2 ¢ 11. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. and had the least number of outlets.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. Freight costs are therefore high. with little or no influence from other retail gasoline markets. This would suggest that. in fact the second highest in the study group.

It therefore represents a highly competitive rack market.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. with resultant low average outlet throughputs. placed Montreal lowest of all study markets in terms of consolidated net revenue. With 32 competing brands. This.000 1.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . combined with low petroleum revenues and high operating costs. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.43 ¢ 0.extax Montreal Posted Price . This market had the highest tax content of the study group due to high provincial tax rates (in 1996. and is also relatively close to wholesale supply sources in the US.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. Price history / Taxation: As the figure shows. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. a function of a competitive rack market and an excess of retail outlets competing for market share.3 ¢ 5. Figure 34: Montreal .5 cents per litre was introduced into the Montreal area).Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . pump prices in Montreal have generally been at or below the 10-city average for major markets. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity.394. this market interacts with several other markets in the region.775. an additional tax of 1. thus promoting a competitive climate. pump prices in this market have a tendency to be volatile.Montreal population # of brands # of outlets outlets per 10. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. this market ranks first of the study group in terms of brand variety.870 32 866 4. Montreal was included in the selected market study.144 litres 5. Influence of other markets: Like Toronto. On an ex-tax basis however.

289 litres 12. Gross product margin was accordingly high. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.250. but is quite isolated from any other markets.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. a partial factor in the high cost of gasoline in this market.08 ¢ 11. were quite typical of markets with similar populations. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. within a cluster of other markets with similar attributes. Freight costs are therefore somewhat high. this amounted to a reduction of 5. MJ ERVIN & ASSOCIATES 67 . Nevertheless. yet is geographically quite isolated.000 120.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. although low. but as the figure shows. In the case of Chicoutimi. this market has little potential as a rack market.605 14 97 8. Chicoutimi is normally supplied from the Quebec city rack. both pump and ex-tax prices in this market were higher than average. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.75 cents per litre.Chicoutimi population # of brands # of outlets outlets per 10. Margin/Throughput relationship (Figure 24): Outlet throughputs. Consolidated net revenue: was average among the study group.28 ¢ 1. by tank truck. for example).

in fact the highest in the study group.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. Nevertheless. a key factor contributing to its 14. in the case.50 ¢ 3.17 gross product margin the highest of the study group. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. so that virtually all sales volume represents local demand only.33 ¢ 14. Gaspé is well-removed from any major highway. Influence of other markets: This is clearly an isolated market. both pump and extax prices in this market were higher than average. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack.000 16. located at a considerable distance from its rack source of supply. by tank truck. with little or no influence from other retail gasoline markets. Although operating costs are likely to be low in a small market like Gaspé. amounting to a reduction of 5.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. ancillary revenues would likely be modest.75 cents per litre. Consolidated net revenue: No data was available for this market. a product of high freight costs and gross product margins.900 litres 17. this margin was only slightly higher than expected for a market with these throughput attributes. MJ ERVIN & ASSOCIATES 68 . Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. Nevertheless.400 6 13 4. This is a major factor in the high cost of gasoline in this market. Freight costs are therefore high.Gaspé population # of brands # of outlets outlets per 10.

this market fell within the expected range of gross product margins as a function of outlet throughput.79 ¢ 0. Since provincial taxes are among the lowest in the country.000 74. Nevertheless.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. the Saint John retail market is relatively isolated from other retail markets of any significance. reflected in the high ex-tax pump price. retail pump prices are ultimately a reflection of rack prices. That a major refinery resides in this market might suggest that these prices should be among the least in the country. Average gross product margin was consequently high. ex-tax prices were relatively high.095. resulting in lower than expected average outlet throughputs. Figure 35: Saint John NB .Saint John NB population # of brands # of outlets outlets per 10. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. which for Saint John. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. Accordingly.970 9 56 7.694 litres 9. with or without a local refinery. Consolidated net revenue: was average for the study group. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. Saint John presents some unique characteristics for the market study.extax MJ ERVIN & ASSOCIATES 69 . Price history / Taxation: Historically.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada.27 ¢ 9. it is an established rack point. and therefore. In fact.ex tax Canada Average . freight costs in this market are low. and is capable of shipping and receiving wholesale product through marine facilities. posted pump prices in the Saint John market have closely followed the 10-city average. do not differ markedly from any other rack point in the study group.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

MJ ERVIN & ASSOCIATES

70

Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

MJ ERVIN & ASSOCIATES

71

Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

MJ ERVIN & ASSOCIATES

72

..... when compared on an ex-tax basis..... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.......................................................... while those with high Gross Product Margins tend to have low outlet throughputs.............................. residuals for outlets not studied may be better........... the profitability of the 481 outlets studied appears only marginal........ 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness.........................................51 Finding 21: Based on published rack prices and the individual outlet data........................... .... .... a feature of most market-regulated commerce....... remote population centres......................... ............................... 71 MJ ERVIN & ASSOCIATES 73 ...........Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products......... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre............................ are principally a reflection of changes in the underlying price of crude oil............................ and likely a negative impact on consumers...... 48 Finding 19: Based on published rack prices. 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.......................... which in turn.... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US........... ............ these ancillary operations contributed to a lower product margin and consequently................ the residual represented a net loss to the supplier......... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements......... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied....... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.. 33 Finding 13: From 1991 to 1996..... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads........ 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.. 50 Finding 20: For the 481 individual outlets studied.......................... given the possibility of discounts from posted rack prices and potentially lower overhead costs......... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations................. .................................................................................................... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences......... The viability of the Canadian retail gasoline sector as a whole may be somewhat better...... particularly in comparisons of major urban markets to small.................... In effect....... which ensures a competitive product price for buyer and seller alike......... reduced pump prices...... ..

was observed (Finding 10). was shown to be strongly competitive: • A long-term decline in pump prices. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). when measured in constant and nominal dollars. in comparing Canada average (city) pump prices to those of the United States. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. exhibited a diminishing trend (Finding 13). In comparing several diverse markets. over the long term. is mistaken. each with unique dynamics. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. The study presents such a model. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. Canadian prices have been at or below US prices in recent years. by all objective measures available to this study. Virtually all of the competitiveness indicators examined in this study relate to price. price is but one of four competitiveness “tools” available to marketers (product. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). and promotions are the other three). Although an objective measure of competitiveness is elusive. when taxes were excluded (Finding 14). The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. place. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . 1. the very margins within which this industry operates has. The resultant margins. On a national level. This has not simply been a result of a decline in underlying raw materials costs. 2. As described in this study however. The Canadian retail petroleum products industry. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. Rack and pump prices are determined in competitive marketplaces.

while crude oil markets are considered global in scope and rack product markets are considered regional in scope. municipal levels of government. refiner margins accounted for 5.even negative values. By contrast. rack price and freight cost. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. and do. vary considerably from one population centre to another. While some markets. retail petroleum markets are considered local (municipal) in scope. demand and other competitive factors existing at the time. and in some markets.5 cents. crude costs accounted for roughly 34 percent (Finding 2). since this is the effective range of consumer choice. but even in such cases. these markets have managed to sustain a certain level of viability and competitiveness. when the “outside” factors (tax. are thus a reflection of the state of product supply. 3. The demonstrated exception to this is in markets directly adjacent to nearby US markets. taxation as an element of public policy is an area worthy of additional research. This would entail the tracking of not only pump price. generally do not serve as competitiveness inhibitors. Petroleum product taxes are levied at the federal. Dealers were shown to have a variety of relationships with their supplier. provincial. it is important to understand that. MJ ERVIN & ASSOCIATES 75 . In applying such a model to the retail petroleum marketing industry. an exercise that consumers are unlikely to engage in. The latter two can vary considerably from one market to another.3 cents or 9 percent (Finding 5). taxation differences between Canadian and US markets. well over half of all outlets in Canada operate as lessees or independents. and accordingly. and in some markets. for example) were rationalized. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. and are a predominant cause of inter-regional pump price differences (Finding 16). This implies that the competitive dynamics pertaining to these retail markets can. particularly smaller ones. or 6 percent (Finding 6) of the 1996 average regular pump price. but given its magnitude. measured against the average outlet throughput for that market. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. and product margins accounted for 3. experienced higher than average pump prices. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. but also rack prices and outlet performance. presents a competitive disadvantage to Canadian marketers. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). Due to the localized nature of competition in the retail gasoline marketing sector. or even between Canadian markets with differing tax structures. Taxation is a significant factor in the price of retail gasoline.

Demand for gasoline was shown to vary significantly according to the time of year. on a per litre basis. in a highly distinct. This margin represents gross revenue (after wholesale product and freight cost) which. Sioux Lookout. a price-stable market. on the basis of price fluctuation alone. second only to the United States. This consolidated outlet revenue. dealer income. which in turn. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. MJ ERVIN & ASSOCIATES 76 . Rack prices were shown to not significantly differ between major centres. While price wars are undoubtedly an indicator of competitiveness. 5. showed a close relationship to underlying crude prices (Finding 11). constitute a small portion of the retail pump price. which represent the majority of Canada’s population base. and a loss in the case of urban markets. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). 4.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). Retail pump price changes showed a close relationship to underlying rack prices. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. the Canadian retail marketing sector realized an average gross margin of 3. and more price-stable markets such as Sioux Lookout.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. Retail pump prices showed a corresponding seasonal pattern. which in turn is the principal driver of ex-tax pump prices. fluctuating prices are a strong competitiveness indicator (Finding 7). predictable seasonal pattern. incorporated with ancillary revenues and outlet costs. reflecting consumer demand behavior (Finding 15). In fact. exhibited competitive traits typical of any of the study markets. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. the absence of price war activity does not imply a lack of competitiveness. when distributed these three ways (Finding 20). when examined on the margin-volume model. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. Pump price fluctuations can be an indicator of competition in the marketplace. Retail gasoline marketing revenues. is available to provide for all retail marketing operations including outlet costs. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. supplier costs and profitability. Viewed from this perspective. The pump price/margin model shows that in 1996.

A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. and the marketing sector in particular. several competitive strategies. assuming all other costs were unchanged. despite increases in tax content and crude costs (Finding 12). improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). but to increases in underlying rack prices. Both the downward trend in margins. despite the predisposition of many observers to use them as such. Since 1991. This trend has both resulted in. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. and have resulted from. 7. Indeed. in the long term these fluctuations are likely more reflective of market restorations. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. these findings clearly show that pump price increases are ultimately linked not to increased profits. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. including: • • • improving production efficiency through refinery plant rationalizations (closures). most outlets used in the 19-market study represent major integrated oil companies. Thus. MJ ERVIN & ASSOCIATES 77 . and the associated industry initiatives which are ongoing in nature. not excessive profits. both of which are beyond the direct influence of Canada’s oil companies. not price. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. and has been a result of. this industry sector would have realized profits of unprecedented proportions. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. Declining refiner and marketing margins. based upon an assumed posted rack price. Thus. crude costs. serve as perhaps the most significant indicators of competitiveness in the downstream industry. have caused.6. Nevertheless. if Canadian average pump prices were only one cent higher than they were in 1995. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Industry profitability is extremely sensitive to very small changes in pump price. Also. and in turn. While these economics might appear to place this industry in a position of poor viability. intense competitive pressures in the downstream industry in general. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. Also. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre.

and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). although this study provides comprehensive evidence of this. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Although some smaller markets appeared to have higher gross product margins than larger markets. Thus.8. Smaller. and this study showed that gasoline prices were no exception. That such a relationship should exist was not surprising.5 million fewer litres of gasoline than a group A (major centre) station. most markets. regardless of size. average pump prices were relatively high. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). virtually all of the 19 study markets exhibited similar levels of competition. This created some economic pressure to sell product at a higher pump price. which could actually inhibit competition. reducing the number of outlets may also reduce the number of competitors. more isolated markets are generally higher than in larger centres. 9. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. MJ ERVIN & ASSOCIATES 78 . which should. the solution would be to encourage some dealers to exit the market. reduce pump prices. other factors exist which contribute to relatively high margins and prices. In suggesting this approach however. • • At first glance. Outlet throughput is a key determinant of inter-market pump price differences. thereby improving petroleum volumes and ancillary revenues at the remaining sites. poor outlet throughputs were generally the predominant factor. there are three points to consider: • In very small markets. When these margins were compared to their corresponding outlet throughputs. isolated markets face particular challenges: although found to be highly competitive. had petroleum margins which were commensurate with average outlet throughput for that market. it would seem that if local government in smaller markets were interested in lowering pump prices. A wide range of petroleum gross product margins were evident within the 19market study group. When plotted against the margin-volume model. While competitiveness in most smaller markets was shown to be as active as in larger centres. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. according to the margin-volume model. The costs of most consumer goods in smaller.

Retail ancillary operations are a critical element of petroleum price competition. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. 10. and in turn. and likely others in Nova Scotia. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. are an acceptable limitation on pure competition (Finding 8). and as such. and the perceived effect on their markets. is well beyond the scope of this study. and the traditional automotive service bay. The federal Competition Bureau for example. under the current PEI regulatory structure. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). A full analysis of the various features of the Nova Scotia and PEI regulatory structures. The historical record is clear however: since deregulating pump prices. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. As these findings show. characterized by narrow product margins and relatively flat pump prices. many national and local environmental regulations exist for good cause. 11. does not appear to benefit in consumer terms. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). has seen a decline in pump prices relative to other Canadian markets. car wash. MJ ERVIN & ASSOCIATES 79 . Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. in order to build upon the findings in this study towards a full understanding of the dynamics at work. Also. Charlottetown. as marketers find even more innovative ways to attract market share. The loss of employment represented by a station closure may be of some concern to smaller communities. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. is both the cause and consequence of increased activity in ancillary operations. the Halifax market. the degree of price competition in the retail petroleum has in effect. Convenience store. This competition then. depressed petroleum revenues below that of outlet operating costs. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. will likely preserve a highly competitive petroleum market. is viewed as an agency which exists to the benefit of industry and consumer alike.• A full-serve retail gasoline outlet typically employs 3-5 staff.

This should be in the form of a quarterly summary of price trends and related measurements. Improve public understanding and awareness of competition in the petroleum marketing sector. and the nature of competitiveness influences. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. as it does in the Canadian petroleum marketing sector. in a simple format designed for consumers and legislators. margins and competitiveness factors. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. Public perception measurement.This study proposes rather. and the converse image held in much of the public domain. direct regulatory interventions may have an adverse effect on competitiveness. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. not inhibit. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. 2. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . that where a healthy competitive climate exists. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. petroleum marketing competitiveness. A regular comprehensive competitiveness evaluation. possibly to the detriment of the consumer. 1. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Develop cooperative industry research into marketing sector competitiveness issues. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives.

using Canadian and foreign selected markets. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. • • • • * * * Better understanding of this industry. consumers. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. and issues/opportunities facing such markets. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. along the lines of the model used in this study. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. using Canadian and foreign selected markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. and in particular. MJ ERVIN & ASSOCIATES 81 . and regulators alike. using Canadian and foreign selected markets. by industry.

Appendices MJ ERVIN & ASSOCIATES 82 .

Grade Differential .. currently established at 10¢ per litre. These product taxes include Excise tax. Excise Tax . such as a major oil company or regional refiner/marketer. safety and business issues. such as lessees.a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. and therefore purchases its supply of petroleum product from an outside source. for example. which serves as the voice of the petroleum products industry in Canada on environment. Lessee .the retail price of gasoline that would be displayed if all product taxes were removed.Canadian Petroleum Products Institute. Dealer . There are several modes (see below) of dealer operation. etc. the regular unleaded pump price.I Glossary of Terms Ancillary service . Ex-tax Pump Price . municipal tax levees. Downstream . The ex-tax pump price is exclusive of these taxes. CPPI .a service provided in addition to the basic retail petroleum sales operation. such as a retail gasoline outlet. and in some regions. Independent Petroleum Marketer . but inclusive of any corporate taxes on earnings. in cents per litre. Integrated Oil Company . Usually expressed on a per-unit basis. MJ ERVIN & ASSOCIATES 83 . an association of petroleum refiners and marketers.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. car wash.the difference in pump price between a premium or mid-grade of gasoline vs. GST. and commission dealers.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers.(for the purpose of this study) the cost. etc. of transporting petroleum product from the rack point to the final point of sale. diesel.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. lubricants. and included in the retail pump price.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier.. Distribution Costs . and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee.a generic term referring to a retail outlet operator. generally expressed in cents per litre. Margin .the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. service bays. Marketer .a petroleum marketer who is not involved in the refining of petroleum products. health.an organization who sells refined petroleum products to end-use consumers. such as convenience goods. provincial pump tax. Major Oil Company . independent dealers.

an organization who. these can be broadly classified as company operated.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. Supplier .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. Refiner . Throughput . lessee.the type of contractual relationship between the supplier and the dealer (outlet operator). Although in theory the transfer price could be set at any arbitrary value. manufactures (from crude oil) a range of petroleum products suitable for consumer use. Transfer Price . with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. usually per month or per year.the segment of the oil industry involved in the exploration and/or production of crude oil. it is usually based on the market-driven rack price. the raw material from which petroleum products are manufactured. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. Rack Point .a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces.the wholesale price posted at the rack point. PCF . commission dealer. In the retail gasoline sector.within the context of retail gasoline marketing. Upstream . This may be at a refinery loading terminal. an association of upstream and downstream oil companies and related organizations. MJ ERVIN & ASSOCIATES 84 . and independent dealer. the supplier has initial title to the petroleum product as it leaves the rack point. Regional Refiner/Marketer .Petroleum Communication Foundation. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products.Mode . Rack Price .the point at which title to refined product is transferred from the refiner to the supplier.

0 1988 108.3 125.1 97.4 134.5 120.8 106.5 25.4 122.5 111.7 29.5 49.1 117.5 124.2 92.4 57. Nominal (¢/litre) (2) RUL Ex-tax Price.1 115.8 132.4 34.4 110.5 94.8 1987 104.4 97.9 97.5 112.3 115.7 96.6 92.8 47.3 96. 1986 Constant (¢/litre) (3) RUL Ex-tax Price. using a weighted (by provincial gasoline demand) 10 city average.8 108.9 155.3 1992 128.0 135.9 1993 130.8 93.0 19.0 32.2 109.5 115.3 1989 114.1 120.4 120.7 123.4 45.2 133.9 26.9 1995 133. No. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.3 27.7 124.1 103.0 30.1 1990 119.9 108.3 141.6 136.1 117.2 20.8 135.2 45.4 136.1 120.3 122. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.8 104.1 151.2 45.1 104.6 107.1 87.3 19.6 133.7 122.7 54.2 31.3 151.3 160.3 52. Nominal (¢/litre) (2) RUL Annual Price.4 53.3 132.9 1994 130.1 104.2 99.2 121.4 27.3 134.4 29.7 22.7 118.5 126.5 100.3 40.4 152.2 142.0 93.5 30.1 105.7 30.0 1991 126.6 91.1 40.0 42.7 132.1 48.2 112.0 115.4 104.2 50.9 118.8 28.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.2 30.1 26.3 119.0 93. MJ ERVIN & ASSOCIATES 85 .0 111.6 122.7 95.8 130.0 104.3 139.2 49.1 144.9 26.3 58.5 145.2 127.4 104. 62-010: Consumer Prices and Price Indexes.8 95.0 97.1 167.1 126.2 39.4 124. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.0 102.9 122.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.6 51.1 146.9 115.3 55.8 94.

8 22.1 16.3 14.5 14.3 22.7 Downstream Margin 14.7 31.9 25.7 39.0 25.2 4.7 14.3 15.9 17.4 24.9 23.3 58.7 29.2 29.5 Gross Marketing Margin Gross Refiner Margin 53.3 26.6 13.6 28.1 39.8 23.0 7.2 8.6 13.6 54.5 26.0 7.4 9.9 26.7 63.5 26.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.8 24.3 66.5 31.1 13.5 23.4 34.2 13.6 20.3 15.7 15.2 25.5 35.0 5.Table B: Key Price / Margin History .9 7.5 22.3 54.6 6.2 27.5 8.2 7.4 56.2 13.7 25.5 57.8 53.5 23.9 14.9 6.3 13.6 54.1 23.1 21.2 6.1 13.7 58.2 65.0 26.2 13.2 14.5 10.9 11.4 MJ ERVIN & ASSOCIATES 86 .7 4.5 7.6 54.4 57.5 25.2 27.5 6.3 6.7 14.3 13.7 34.0 15.3 54.0 22.2 15.0 14.9 4.0 24.9 7.3 17.5 15.8 53.1 16.1 23.8 29.3 23.1 53.7 7.4 15.8 15.9 12.9 25.6 25.8 57.2 14.9 8.1 53.0 13.8 26.7 24.7 14.1 16.8 11.0 26.2 56.9 26.5 32.6 4.0 16.0 55.8 9.5 11.7 29.5 7.6 26.3 13.8 8.4 58.7 18.6 26.9 56.3 4.7 29.9 25.6 23.4 31.2 63.9 6.4 20.7 13.1 13.2 22.9 55.0 28.1 18.4 14.8 21.4 30.3 42.9 30.1 7.1 52.8 8.0 24.7 19.8 26.9 25.5 33.0 10.7 7.8 55.6 7.2 12.3 9.7 23.5 28.5 54.2 7.4 14.3 5.0 9.4 13.2 11.2 5.4 8.9 22.1 22.0 24.2 24.3 13.6 18.5 30.2 25.2 6.9 9.5 14.5 5.7 4.2 26.7 18.0 24.0 16.2 26.5 27.9 4.1 29.2 13.0 7.9 21.7 33.3 56.9 23.9 54.9 15.7 6.2 21.0 26.9 23.9 14.9 24.9 53.0 4.7 8.1 17.9 6.4 55.4 24.3 24.2 27.4 29.4 13.6 52.0 16.3 54.6 24.0 52.2 23.4 7.3 26.2 7.2 41.1 23.8 14.4 14.7 14.8 14.0 16.9 56.1 16.0 24.6 9.5 27.1 18.5 23.1 7.3 57.8 23.0 24.1 5.3 25.9 31.1 22.8 55.6 5.0 33.8 25.4 26.4 32.1 24.8 14.1 25.4 26.3 22.0 8.4 26.6 23.8 16.7 28.0 25.7 32.6 26.7 14.5 56.0 24.8 14.2 16.6 25.1 19.6 21.3 Tax Content 23.8 28.2 7.5 19.9 53.4 33.9 58.8 21.5 10.9 7.2 16.4 12.9 55.4 31.3 6.8 13.5 16.4 21.3 12.0 54.9 13.7 4.3 56.9 25.1 9.8 33.7 7.7 19.8 30.3 13.4 22.6 8.0 20.4 53.2 23.7 12.4 14.0 12.

9 28.9 11.6 15.7 52.3 26.0 52.0 28.3 58.7 24.5 20.5 7.7 3.1 51.0 57.3 26.0 14.2 7.4 11.7 7.8 4.0 11.5 17.5 54.7 7.8 17.8 25.4 21.1 10.7 5.5 21.3 13.2 14.1 54.4 5.3 7.3 26.3 23.9 14.0 5.0 24.0 28.6 5.0 6.9 49.6 12.7 8.0 54.0 27.8 52.5 19.2 7.7 51.1 26.1 15.1 57.4 13.7 14.4 25.9 17.9 58.6 20.5 5.2 25.6 15.0 28.4 28.3 4.7 53.3 21.5 7.2 12.0 14.9 5.1 26.2 20.3 6.7 53.4 16.5 15.5 53.2 54.3 54.6 9.8 23.4 26.2 Gross Marketing Margin 4.6 10.0 26.4 24.8 23.9 26.3 26.8 28.9 4.0 12.6 21.6 17.0 25.6 4.7 6.5 3.2 4.0 53.7 26.0 6.1 15.4 21.6 53.1 6.9 9.4 25.8 27.5 4.7 23.2 25.6 16.1 51.3 27.2 15.7 13.2 20.7 29.3 26.7 3.8 6.9 6.3 55.4 7.1 20.5 25.8 50.1 6.6 10.7 26.2 9.1 14.3 26.3 4.0 6.5 2.1 Gross Refiner Margin 7.6 20.6 3.4 51.8 29.6 27.3 25.6 11.9 27.3 28.6 53.4 6.5 21.1 3.6 19.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .9 19.2 14.5 9.3 21.9 12.5 3.0 29.0 25.5 23.7 13.5 6.5 5.5 11.9 29.9 12.5 19.8 20.7 25.9 14.7 18.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.8 49.2 5.4 6.7 5.2 4.5 6.9 Downstream Margin 12.1 21.4 26.1 6.2 49.0 26.8 10.4 6.4 4.1 11.1 15.5 28.1 Tax Content 26.1 26.8 22.4 32.3 9.5 11.5 21.7 12.0 28.1 61.7 24.1 11.7 14.2 23.5 13.7 53.3 12.7 15.0 5.1 16.3 9.1 11.2 14.3 26.5 14.2 11.5 6.7 16.1 11.4 6.0 28.5 13.6 23.4 15.2 7.4 26.6 4.2 26.1 6.0 12.3 8.4 26.0 9.3 53.2 7.3 26.9 27.3 7.9 4.9 3.9 29.1 14.1 55.2 28.7 25.2 26.8 28.2 26.7 6.3 9.0 9.5 55.3 28.9 23.2 27.3 26.1 24.1 14.3 4.9 49.

1 29.628 3.2 24.113.245.181.897 2.141.853.056 3.321.201.256 2.7 31.865.0 20.142.587.765 3.4 21.2 27.192.9 21.151.287.779 2.287 2.810.285 2.412 2.8 27.015 3.7 24.647.626.661 Canada Avg ex tax RUL pump price (¢/l) 39.2 20.458.4 21.781.564 2.5 27.661 Canadian Domestic Gasoline Sales (M3) 2.3 23.687.677 3.067.580 3.1 23.904.752 2.839 2.521 2.112 2.7 29.326.931 3.Table C: Canadian Supply.651 2.133 3.255 3.627 2.7 29.379.322 2.202 3.8 23.095 2.323 3.808.331 2.2 23.840.029 2.370 2.475 2.160 3.979 2.180 3.889 3.725.589 3.7 18.269 2.960.294.508.930 3.403 2.9 23.7 34.801.455.682 3.141.301.995.883.933 3.938.869 2.673 2.254 2.823.516.268 2.298 2.378.202.000 3.176 2.044 2.6 26.592 2.622.089.636.782 3.324 2.4 31.1 22.566.644 3.720 3.286.9 26.976.462.894.361.182 3.633.973.193 3.615 2.415 2.941 2.878 2.254.876.457 2.709 2.490 3.1 16.246 2.480.073 2.684 2.381 2.703 2.120.373.6 24.251.5 28.297 2.168 2.291.1 23.301 2.558.108.450 2.897.131.499 2.322 3.637 3.804 2.045 2.935 3. Demand.035 2.9 29.979 3.8 22.416 2.620 3.743 2.748 2.8 28.5 23.671.893.476.097 2.2 27.354.871 2.411.900.952.3 24.767.7 26.3 23.518.095.7 28.437.804 3.864 2.193 3.968 3.833 2.8 26.773.9 22.798.429 2.1 21.485 2.270 3.022.9 23.140.7 21.301.502 2.3 22.443 2.886 3.389.853 3.473.818.254.325 2.688.218 3.322 2.775.011 2.714.2 26.045 2.081.114 3.130 3.612 3.498.085.4 29.429 2.427.874 3.859 2.311 3.4 24.199 2.5 27.884 2.890.2 26.641.141 3.709 2.313 2.880 Canadian Retail Gasoline Sales (M3) 2.672.9 31.873.609.666.235 3.630.299.853 2.967 2.8 21.667 2.4 25.161.8 33.335 2.636.735.8 30.9 26.646 2.8 23.837.3 26.572 2.2 22.430.019.822.437.5 22.002.633 2.970 3.844.716.346.025.132.813 2.744.8 29.299 2.5 31.206.218.047 2.122 2.369.179 3.2 21.456 2.544 3.693 3.5 19.654.439.501.045.366 2.083.102.020 2.026 2.3 22.409.122.604 2.003.3 Canada Avg RUL Rack Price (¢/l) 35.176 3.966.369 2.802 2.6 28.338 3.732.188 3.9 19.422.479 2.998.281 2.969 2.051 3.739.6 23.030.191 2. Inventory. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.7 24.599 2.1 23.9 23.532.510 3.565.799.315 2.841 2.281.7 29.220.5 25.2 27.039.934.767.180 2.070.037 2.345.831.801.027 2.262.047 3.316.5 32.2 23.558.897 3.075.613 3.748.830.9 17.785.101 2.682.300.5 30.4 22.279 2.2 27.263.152 2.250.771 3.970.9 30.377.441.469 4.827 3.070 3.729.329 3.6 21.209.4 32.619 2.180.232 3.625 2.4 24.283.287 2.930.710.8 MJ ERVIN & ASSOCIATES 88 .101.958.477.509 3.843.796.642.669.0 24.333.970.932 2.733 2.242 2.0 28.295.130 3.2 29.887.164.461 3.621.600.

8 25.791 3.4 25.386 3.170 Canadian Retail Gasoline Sales (M3) 2.825.149.658.261.7 22.703 3.857.806.830 3.037 3.370.346 2.0 26.1 21. demand.656 3.671.864 2.320 3.426.984 3.675 2.363.382.0 25.195.0 26.097.148.204.170 3.198.6 20.315.994 3.997 2.165.141 2.505 2.055 2.521 2.7 Canada Avg RUL Rack Price (¢/l) 20.7 21.692.606.961.5 25.970.906.074.644 3.469.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.614.679.068.048.928 3.940 2.219 Canada Avg ex tax RUL pump price (¢/l) 27.336.077.863.442 2.198.414 3.881.8 24.601 3.539.797.566 3.4 26.936 3.376.467 2.112 3.977.480 2.648 3.130 3.0 24.904.317 2.519.9 29.617 2.714 2.2 25.999 3.244 3.324 2.338 2.205 2.005 2.8 21.597 2. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .5 21.5 source: Statistics Canada (production.155 2.0 25.986.669 2.753 3.799 2.179.889.294 3.773.9 22.516 3.785.390.483.2 25.386 3.796.871 3.7 19.006 3.660 3.1 24.8 20.4 20.930.2 26.214 2.250.555.415 2.8 28.4 26.649.9 27.965.667 Canadian Domestic Gasoline Sales (M3) 3.082.638 2.840 2.649.717.607.198 2.919 2.593.537.344 3.264 2.264 2.184.222 2.5 21.620.6 20.324.123.182.

9 54.5 51.9 56.3 49.7 50.3 54.3 55.2 48.5 51.9 62.3 50.4 52.8 47.9 58.7 62.9 61.5 59.6 54.1 55.9 61.2 62.2 54.9 53.8 57.2 51.0 59.4 54.0 62.9 53.2 51.8 48.8 56.8 64.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.5 56.2 63.4 52.6 50.4 55.9 52.7 50.3 55.5 57.6 53.5 57.9 44.9 53.7 48.9 56.2 50.8 52.7 51.7 52.9 54.9 59.9 50.4 52.9 47.0 61.8 54.9 54.9 51.6 46.0 61.5 57.1 56.7 62.9 51.7 49.9 56.9 54.7 63.5 59.1 50.3 52.6 62.6 59.2 43.1 52.4 56.7 45.7 51.9 52.9 53.2 51.9 53.6 58.4 Winnipeg 49.9 53.4 50.4 55.4 54.5 45.7 53.0 57.7 54.8 52.9 53.4 56.9 54.3 48.5 55.9 55.9 61.5 58.6 55.9 56.4 57.4 49.2 62.9 56.5 56.1 49.4 52.5 59.9 52.8 53.5 60.6 48.4 53.9 47.2 59.8 50.9 64.0 44.9 54.4 52.0 50.9 56.5 59.2 62.0 39.7 54.9 55.5 58.5 51.1 49.5 46.8 53.2 62.4 61.5 58.5 58.5 60.5 59.3 49.7 65.5 59.3 52.4 65.5 59.9 53.4 61.5 52.9 53.0 58.6 53.7 46.3 61.1 53.9 64.1 41.4 47.3 50.9 54.9 51.2 62.9 49.9 64.5 58.3 54.2 46.2 65.8 50.8 56.2 47.7 White Rock Calgary 45.1 49.9 56.4 55.5 57.9 61.6 50.2 46.4 53.0 59.6 58.4 53.6 47.9 47.5 57.8 Thompson 59.2 56.0 46.8 53.9 58.0 61.4 56.7 53.9 64.9 55.1 55.5 53.4 46.1 44.4 56.3 59.2 62.5 59.5 57.9 52.9 51.5 57.7 65.8 59.7 54.2 54.5 47.1 59.4 48.0 61.8 56.5 57.5 54.1 44.5 47.2 Nanton Peace River Regina 49.5 51.5 49.4 55.4 46.9 52.0 52.1 50.8 48.8 48.5 57.9 53.9 46.4 58.8 51.5 52.2 57.5 58.7 53.4 59.6 55.Table D: Pump Price History .9 61.5 61.7 52.8 56.9 58.7 57.2 55.1 43.0 62.7 45.3 48.9 MJ ERVIN & ASSOCIATES 90 .2 62.5 58.7 57.8 59.4 46.5 60.9 57.5 53.3 52.7 51.9 52.8 52.5 57.5 59.9 44.0 48.5 57.9 49.4 61.9 63.4 55.0 55.8 45.3 51.5 60.7 65.6 48.8 56.2 54.5 50.6 47.4 63.9 47.4 56.7 44.2 46.6 56.3 52.9 61.0 61.1 52.2 62.1 60.5 58.9 52.5 56.7 65.4 58.5 60.9 58.5 58.9 64.9 57.5 62.3 42.9 53.9 56.5 47.6 49.0 Sioux Lookout 62.6 52.9 49.5 53.9 56.4 54.5 61.6 48.7 48.8 52.2 50.4 56.5 57.6 54.5 Vancouver 53.8 55.3 62.5 55.2 62.8 49.6 47.6 44.8 44.8 52.9 58.8 53.9 55.5 51.1 53.0 54.3 52.5 56.9 56.7 65.6 51.2 61.1 55.9 62.9 48.6 46.0 52.5 56.2 58.3 56.5 58.5 60.8 47.4 55.5 57.9 59.8 57.0 61.8 48.4 57.2 50.9 56.5 58.9 45.5 58.8 56.5 45.8 41.5 54.0 61.9 54.0 62.2 65.

2 54.3 53.8 52.8 54.4 53.7 56.8 56.5 64.3 54.8 55.5 53.0 57.6 55.0 50.3 59.9 55.8 47.1 53.9 55.2 55.2 51.8 54.0 60.2 56.1 60.5 54.3 56.9 55.2 57.2 56.4 49.1 55.3 52.1 52.4 54.6 58.6 51.0 57.8 53.6 63.0 50.2 58.5 52.2 61.2 52.5 MJ ERVIN & ASSOCIATES 91 .3 56.2 Chicoutimi Gaspé Saint John 60.7 53.Table D: Pump Price History .2 54.1 61.5 51.9 61.9 56.9 57.0 47.3 53.8 50.9 61.0 50.4 45.1 55.0 55.3 54.7 54.7 51.9 55.4 51.9 49.4 57.3 59.6 56.0 61.8 55.2 54.7 56.3 56.6 49.6 52.6 53.6 54.6 54.9 63.7 56.0 58.4 58.8 55.6 61.1 55.0 48.8 53.3 53.0 53.6 58.8 55.7 56.2 55.2 59.9 49.2 57.2 49.0 54.9 60.7 47.4 58.1 57.2 54.1 51.6 61.5 53.3 55.7 57.9 61.5 54.7 56.8 49.6 53.1 61.2 53.5 64.9 49.0 55.5 63.9 56.8 55.8 50.5 56.9 53.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.8 59.7 49.6 63.4 60.3 55.6 53.7 50.5 54.0 59.8 51.9 64.1 53.6 55.2 53.1 54.7 48.5 52.9 61.0 55.6 55.3 53.4 54.9 55.2 56.2 57.9 64.7 54.0 56.2 57.6 54.7 54.4 54.1 54.6 58.1 55.8 60.1 Toronto 52.6 58.1 54.8 49.9 53.2 59.6 Canada Avg 55.6 60.1 61.7 57.7 58.2 60.4 53.5 61.9 54.7 51.8 54.6 51.6 55.5 56.7 46.5 48.1 53.5 59.7 54.0 52.0 51.6 52.8 50.1 59.6 52.0 53.9 60.5 57.0 52.6 63.9 58.6 51.0 56.3 52.3 54.0 48.5 61.6 52.1 58.1 56.2 Montreal 63.0 53.3 56.1 53.5 53.3 51.9 55.8 61.4 51.3 54.7 53.8 61.2 55.1 57.5 54.6 59.7 55.1 54.3 54.8 57.3 59.1 58.1 58.6 54.1 54.1 60.3 56.6 55.6 55.6 53.5 51.6 52.1 59.9 60.5 55.9 53.8 57.0 55.6 57.2 56.0 60.4 58.3 53.2 55.2 58.7 54.8 60.4 51.5 59.2 60.2 57.2 58.9 56.1 52.4 57.9 55.4 54.6 56.8 56.3 49.1 53.7 57.8 55.2 57.7 52.9 57.3 55.7 54.1 51.1 49.0 59.4 54.6 58.5 54.0 57.9 53.4 57.0 52.1 55.3 52.6 50.0 47.5 51.5 56.9 53.0 52.5 54.2 49.6 59.0 56.3 54.9 61.5 59.9 55.3 52.1 57.5 52.8 63.7 56.7 48.4 58.5 57.4 53.2 49.7 59.0 61.5 56.4 55.1 56.2 55.1 51.5 Ottawa 58.0 51.4 54.0 55.9 58.6 52.4 57.5 63.2 55.6 56.3 55.3 55.2 49.0 54.0 54.2 57.7 52.8 Halifax Charlottetown 60.9 54.7 59.7 60.2 51.9 57.1 54.0 60.6 49.8 53.0 52.7 58.7 51.2 61.7 57.6 55.7 57.8 55.4 57.1 55.6 56.9 56.5 55.9 52.0 60.3 55.6 50.3 58.5 51.0 49.2 56.2 57.9 50.1 56.4 57.5 60.2 51.2 52.2 61.3 62.9 64.4 50.3 57.5 57.5 56.2 56.5 57.8 52.0 57.5 67.7 52.5 61.6 59.4 53.9 55.2 57.9 54.8 55.0 59.6 54.0 52.7 44.7 51.4 58.3 54.3 54.0 54.4 54.5 63.3 60.1 48.1 52.1 58.2 53.4 58.9 62.6 54.3 61.3 49.5 55.8 57.4 54.9 49.4 52.6 52.2 57.2 54.5 54.9 51.0 55.5 57.2 56.3 54.9 57.6 54.4 52.2 52.5 60.8 54.7 64.9 55.6 50.5 52.2 50.5 53.2 56.4 55.3 59.5 58.

1 19.1 24.5 28.5 Jul-95 30.9 30.4 29.3 26.8 Jan-94 25.4 25.4 31.2 28.4 23.1 26.5 26.7 30.6 25.5 24.0 Apr-92 30.4 20.8 27.4 25.6 22.8 23.4 27.3 Feb-95 26.0 26.9 28.1 20.8 27.6 26.2 27.6 22.9 27.3 Dec-95 Edmonton Regina extax extax 27.4 22.4 28.4 31.4 20.9 23.3 29.5 27.1 30.6 Mar-93 28.7 30.4 31.8 24.5 29.7 Sep-95 30.9 25.3 27.4 29.7 28.1 23.7 26.0 31.4 22.0 27.3 Jan-93 30.3 23.6 24.3 28.2 22.2 26.5 24.4 Dec-92 31.7 26.6 27.9 Jul-93 28.7 26.6 27.2 Nov-94 29.7 30.3 31.5 27.4 30.8 29.5 24.5 23.2 28.4 MJ ERVIN & ASSOCIATES 92 .3 28.4 29.2 29.6 Jun-92 32.3 29.8 27.3 28.5 25.4 21.9 29.2 24.3 29.5 27.8 26.1 22.4 28.0 31.8 26.3 26.9 24.4 31.8 Toronto extax 26.7 Jan-95 27.9 28.8 25.7 Sep-94 32.3 May-94 28.3 21.8 28.8 Feb-94 24.4 29.9 Oct-94 32.6 23.0 24.1 Feb-93 29.8 27.7 28.1 Apr-94 29.8 27.5 Oct-92 30.0 21.9 26.5 21.2 26.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.7 28.9 29.7 31.5 29.6 30.9 24.5 21.3 33.3 28.9 29.5 Sep-92 29.9 26.1 26.7 27.4 29.3 29.9 25.4 27.8 26.6 28.0 22.7 28.4 25.8 Dec-93 26.9 Aug-93 30.6 Sep-93 28.9 25.3 28.8 25.8 24.8 29.2 Apr-93 28.5 Jul-94 29.4 27.3 29.3 29.4 24.1 25.8 21.6 26.3 23.8 26.5 23.0 23.8 24.6 26.4 23.3 26.0 28.7 25.6 29.5 Nov-95 30.2 24.6 29.6 30.9 27.7 29.7 Mar-94 28.6 23.7 Aug-92 24.6 23.4 25.7 27.0 32.5 29.2 24.9 30.8 27.9 26.4 Mar-92 28.7 Winnipeg extax 27.9 25.9 27.2 29.9 27.4 30.6 May-95 29.0 May-93 29.3 29.7 24.4 20.5 27.1 28.2 Nov-93 27.3 Jul-92 31.2 23.2 25.1 28.1 25.3 26.3 30.4 29.6 Aug-95 30.9 31.5 29.6 24.4 31.4 26.0 Oct-93 28.9 24.2 24.5 26.0 24.3 32.4 28.3 27.0 May-92 28.9 24.1 24.2 25.9 30.8 28.7 30.0 26.6 26.1 24.4 30.0 23.9 21.2 28.0 27.6 26.0 29.2 26.9 26.0 Jun-93 26.4 23.1 31.4 22.2 Jun-94 31.4 Jun-95 30.9 24.6 21.6 30.1 25.7 29.7 29.3 30.8 29.2 27.0 23.3 26.6 28.3 30.6 27.4 31.7 28.0 23.4 24.6 29.7 28.7 29.3 30.1 27.4 25.4 31.2 Nov-92 31.5 Oct-95 30.Table E: Ex-tax Pump Price History .8 29.7 24.1 31.0 24.7 30.7 Jan-92 31.9 28.4 30.9 21.1 25.9 28.6 26.4 27.4 27.2 28.5 Feb-92 28.1 Mar-95 29.0 25.0 25.9 20.4 29.2 26.1 30.8 22.5 Aug-94 28.3 24.6 25.3 29.8 24.2 Dec-94 26.8 25.8 31.2 32.6 23.3 29.6 29.6 26.6 27.5 27.9 25.1 27.0 26.3 24.8 28.3 29.1 22.9 23.7 26.3 24.5 29.1 Apr-95 30.6 26.0 25.0 23.

7 22.6 23.2 27.3 27.4 21.6 26.8 33.1 32.5 34.0 34.3 31.6 25.2 25.7 25.7 28.4 31.6 26.5 25.5 33.2 34.3 26.2 25.6 29.2 22.0 26.5 31.0 33.9 23.0 23.5 25.7 27.9 29.2 28.0 36.9 28.6 32.8 27.2 27.9 31.0 25.2 26.1 34.3 31.7 34.9 24.6 32.3 28.2 27.9 37.6 22.1 24.0 36.8 28.6 27.4 33.4 33.4 26.5 28.3 34.5 24.9 29.2 23.8 27.6 26.7 28.6 28.0 27.3 31.9 28.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.7 32.5 25.6 33.5 24.4 31.7 27.0 28.2 26.6 28.9 32.2 29.9 27.2 30.3 30.5 27.1 24.2 32.7 33.4 25.6 36.8 28.0 28.9 32.5 33.1 29.9 30.9 27.8 29.2 32.0 30.2 22.2 28.3 22.7 28.8 28.7 29.0 28.9 31.7 32.8 26.4 36.5 32.9 30.0 28.3 28.6 28.2 21.1 30.3 29.1 Montreal extax 31.1 23.7 23.5 25.0 29.8 28.2 30.8 26.3 29.8 30.3 35.2 22.1 32.0 26.5 25.8 27.0 28.0 33.3 26.9 27.0 34.4 32.8 33.3 27.4 34.3 29.1 30.2 27.7 26.8 30.8 25.8 29.9 29.3 34.5 30.3 23.9 26.6 36.9 29.0 34.1 32.6 31.8 36.3 29.2 36.1 34.2 27.8 29.1 30.0 32.7 26.6 28.7 24.8 32.8 32.0 30.4 24.6 31.6 Charlottetown extax 36.7 Quebec extax 32.2 28.6 34.4 28.8 28.0 23.Table E: Ex-tax Pump Price History .4 27.6 32.8 26.2 27.6 34.0 33.1 32.4 36.9 30.7 24.1 34.6 27.8 23.9 26.6 29.2 24.5 26.1 29.9 29.2 26.0 25.5 27.8 32.6 23.7 27.6 28.6 27.9 33.8 32.7 30.3 25.5 28.7 24.8 29.9 30.8 27.9 27.3 33.5 28.8 23.2 27.3 26.1 29.4 25.5 33.8 23.2 33.7 23.5 30.7 32.1 26.8 30.2 27.1 26.2 25.5 30.0 32.0 25.4 26.2 27.1 28.8 25.4 26.7 MJ ERVIN & ASSOCIATES 93 .3 28.7 27.1 22.2 32.7 26.1 31.9 35.7 26.5 27.1 24.4 32.7 29.2 24.9 29.7 28.8 25.9 33.0 33.4 25.4 33.4 22.8 23.2 26.7 24.3 31.0 26.3 25.4 24.9 27.6 26.4 31.5 27.2 26.1 28.4 33.0 33.7 34.8 Canada Avg extax 29.7 26.9 32.9 32.7 23.7 24.0 29.3 29.5 29.9 29.5 25.2 Saint John Halifax extax extax 34.8 25.8 26.8 28.4 25.2 36.8 29.2 22.3 28.3 25.3 31.2 33.0 31.6 33.8 24.6 24.3 34.5 31.5 28.7 26.1 25.3 25.4 33.6 32.8 26.9 26.4 28.9 30.6 25.6 32.5 36.2 25.7 30.7 28.5 26.0 29.3 28.3 24.1 24.4 32.2 30.

1 20.7 19.1 23.5 23.9 21.Table F: Rack Prices .4 21.3 19.2 20.9 21.4 22.6 19.2 23.4 22.8 20.0 19.3 26.3 22.5 24.0 23.9 22.3 17.6 25.8 23.3 21.3 20.5 21.3 19.4 21.8 18.1 22.6 23.2 21.2 21.8 21.2 16.4 20.9 23.5 22.7 23.3 21.3 23.0 21.1 24.4 22.8 22.4 23.2 20.0 23.7 21.1 21.1 22.6 22.9 22.7 22.4 17.5 21.5 20.6 25.6 21.8 22.9 18.6 20.7 17.0 22.1 21.4 23.8 20.2 18.7 22.8 27.9 20.2 22.8 23.3 23.1 20.6 18.2 Quebec city Montreal rack Toronto rack rack 19.1 22.1 15.4 22.7 18.0 22.7 19.8 22.1 21.6 20.1 21.0 24.4 20.8 22.1 21.4 21.6 20.5 20.8 19.7 22.0 21.6 23.9 22.4 21.6 19.7 22.3 21.5 23.6 21.3 23.8 21.5 21.5 24.8 21.7 20.3 22.3 23.1 19.1 20.2 21.9 22.4 22.1 16.1 22.2 20.9 21.1 Halifax rack 20.2 19.6 20.6 20.4 19.4 22.4 20.4 21.8 19.5 21.2 21.8 23.7 22.4 22.2 20.1 21.1 21.0 21.6 25.8 20.4 21.9 18.2 23.7 22.4 22.9 21.4 21.8 21.9 20.5 22.6 20.4 18.8 23.8 20.5 21.3 24.2 21.9 22.0 21.0 23.7 21.9 18.9 20.5 22.0 22.7 20.9 17.3 20.7 23.8 18.0 23.2 22.5 17.7 17.3 17.7 21.0 21.5 21.2 18.2 19.2 18.3 23.8 21.6 23.0 23.5 17.4 15.8 25.8 19.3 23.4 21.2 16.4 21.6 19.1 22.4 24.3 22.2 20.5 20.0 23.7 22.0 22.1 15.5 22.2 23.9 21.1 18.8 23.7 21.4 21.1 20.6 23.2 18.8 19.7 20.2 16.5 19.0 21.6 20.7 21.8 18.4 21.4 23.0 19.0 21.5 21.8 18.7 18.4 21.8 21.5 18.5 24.3 17.1 19.3 22.8 23.5 19.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.2 23.2 21.4 21.6 19.7 22.1 20.3 18.5 23.6 19.9 21.9 22.5 27.3 21.5 22.0 19.2 29.6 19.4 20.2 20.3 21.1 19.0 23.8 20.9 19.7 21.3 20.0 22.3 20.8 24.5 17.7 21.3 24.3 19.4 22.1 21.2 21.4 22.2 18.3 18.5 26.8 Ottawa rack Thunder Bay rack 20.0 20.9 25.0 20.5 20.4 20.9 23.8 22.9 22.7 MJ ERVIN & ASSOCIATES 94 .2 17.1 23.7 22.1 22.0 22.8 20.7 16.3 19.3 23.1 22.2 22.4 23.8 23.3 18.6 23.2 19.0 23.7 17.5 22.9 24.6 23.9 18.1 20.1 20.4 22.2 21.1 20.1 23.5 21.5 18.

5 23.0 22.8 20.8 21.4 20.8 21.0 24.1 22.5 23.7 22.7 21.9 18.1 18.9 20.1 23.5 19.0 22.3 24.0 23.2 23.5 21.0 24.1 22.5 19.5 20.6 22.2 22.5 21.6 21.7 23.3 22.1 25.3 22.4 21.3 23.9 22.5 20.9 20.4 24.6 19.6 21.8 22.5 22.0 22.2 23.2 21.4 23.4 24.2 20.9 23.0 22.5 21.9 21.6 21.5 24.9 19.1 25.0 22.9 23.9 21.7 22.5 20.9 21.1 23.1 20.9 22.2 Edmonton Rack 23.4 20.5 17.1 24.9 19.3 23.9 21.5 23.2 22.5 21.1 21.8 23.4 23.8 22.7 21.3 19.0 17.5 21.6 20.7 23.1 17.2 19.5 24.0 21.4 18.9 24.4 22.3 24.4 21.5 21.1 23.7 18.1 21.4 23.6 22.1 21.3 21.7 24.9 22.3 21.4 22.5 23.8 22.4 23.5 21.6 22.6 19.9 20.6 25.7 19.6 25.0 18.4 21.4 21.6 23.9 22.5 18.5 18.0 21.7 21.6 23.4 19.3 24.6 21.7 21.5 23.7 22.1 23.0 20.1 25.1 21.9 21.4 22.6 22.9 21.2 21.7 22.2 19.7 24.2 20.0 24.7 25.1 21.2 24.0 23.3 22.6 23.1 22.5 24.9 23.5 22.1 19.5 20.7 17.Table F: Rack Prices .0 17.1 22.9 22.5 21.2 21.7 25.6 24.0 22.2 22.1 21.1 23.0 23.3 23.0 21.9 22.6 20.4 21.6 21.8 Vancouver Victoria rack rack 24.1 22.0 22.2 24.1 20.4 19.8 22.2 22.1 20.2 23.9 19.3 20.7 21.1 21.7 21.8 23.1 23.1 22.7 22.2 20.5 21.9 17.4 24.9 23.8 19.7 22.9 21.3 21.8 22.7 20.8 24.6 24.3 23.3 17.7 21.7 24.9 19.8 20.9 18.7 23.7 22.1 16.6 21.1 23.0 18.2 21.7 22.5 23.4 25.5 24.5 21.7 22.7 21.2 22.2 22.3 23.7 21.8 20.4 21.3 19.1 23.7 23.5 22.0 23.7 21.2 24.9 21.8 25.7 22.0 20.6 23.6 23.6 21.4 21.2 20.8 22.7 23.6 23.2 23.1 18.8 20.5 19.9 22.1 23.6 21.8 24.9 23.6 20.6 23.6 25.8 23.3 24.4 22.9 19.2 22.0 20.2 21.3 22.3 20.3 21.9 24.9 19.5 22.6 21.4 24.5 22.7 21.0 25.9 22.0 24.0 20.6 17.6 21.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.2 20.8 20.1 19.3 17.8 23.9 23.3 17.7 21.5 Canada avg rack 22.2 23.3 18.8 21.5 MJ ERVIN & ASSOCIATES 95 .9 19.6 20.6 23.3 23.0 21.2 24.2 23.8 24.5 23.1 21.9 21.0 23.8 18.5 22.2 18.4 21.7 17.2 24.3 20.9 22.3 20.8 21.0 21.5 19.6 17.9 24.3 23.0 22.1 16.2 22.4 22.1 23.

268 478.810.10 53.10 63.98 59.150 48.26 44.00 48.72 74.88 54.704.052 84.894 1.07 61.245 351.23 63.20 59.093.30 54.00 67.10 59.26 63.23 53.88 64.22 59.53 48.621 102.141.30 63.74 57.945.02 51.370 41.83 68.00 62.678.30 52.Table G: Study Market Data .92 51.997 397.20 58.749 91.858.53 61.102 98.014 3.832 91.60 49.101 256.90 63.770 2.50 56.513 19.65 54.549 111.671 399.40 54.13 58.90 67.60 70.196 669.712 1.86 56.166 102.687 1.334.78 67.90 62.249.00 66.85 54.50 55.414 450.412 722.45 63.10 52.058 2.903 33.220 389.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.20 60.636.97 63.30 57.03 58.00 57.70 49.153 316.702 333.516.70 55.483 63.625 64.300 578.000 1.11 58.93 63.26 49.554 2.438 591.120 570.056.475 1.895 600. MJ ERVIN & ASSOCIATES 96 .669 203.614 3.529 123.00 57.745.72 58.20 54.296 179.949 1.830 2.17 Diesel 64.101 447.790 185.60 50.837 329.34 63.796 2.811 120.194.060.73 65.20 61.850 126.246 2.89 61.897 350.935 758.211 15.597 2.298 576.42 53.38 56.250 748.214 248.448.40 63.834 71.460 833.50 56.85 48.60 60.173 568.55 58.192 2.000 217.97 51.985 636.420.234 799.557.19 49.113 2.377 30.174.749 243.972 429.905 183.508 2.25 57.87 61.890 2.796 529.238 2.009 54.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63. and All Study Markets are weighted (by market population) averages.698 Note: Regional.94 55.145. Urban.30 68.119 632.30 54.483 2.24 61.859 240.35 73.72 63.89 60.643 184.36 54.000 63.16 59.28 65.000 1.48 56.18 51.628 702.66 50.89 65.620.40 59.40 61.702.933 25.400 142.19 52.030.500 378.922 103.980 120.971 473.983 1.332 101.40 58.241 451.30 66.018 2.686 273.32 51.018.45 53.543 2.80 64.204.

73 26.93 23.68 Diesel 36.96 24.16 21.42 24.89 29.25 27. Tax (by Grade) Rack Pt.42 24.73 32.33 21.36 24.33 27.84 28.69 23.45 20.83 24.59 22.17 20.57 29.90 27.03 21.20 27.38 24.07 24.27 20. Urban.88 22.28 22.50 25.15 20.32 33.58 25.07 24.95 Premium 26.99 28.87 26.25 28.81 25.82 28.07 24.15 29.97 23.41 22.74 21.40 25.88 22.88 20.50 20.85 28.49 21.15 24.45 20.64 28.63 21.11 26.55 28.83 24.23 24.47 28.51 20.09 27.65 27.63 28.45 28.04 24.13 23.Rack Price.89 26.43 20.49 25.06 28.43 21.23 23.21 27.07 26.39 21.39 22.33 22.42 27.76 25.63 25.51 31.83 23.45 20.47 27.59 28.04 26.98 28.30 29.21 27.51 25.25 31.36 26.59 22. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.63 20.83 25.97 22.88 20.09 24.93 27.88 28.90 26.40 27.65 26.45 24.28 23.97 25.20 20.49 21.95 25.59 28.08 23.51 25.26 27.43 28.38 24.57 22.92 21.75 27.45 20.37 27.84 28.33 22.34 25.56 22.03 24.83 22.07 26.92 20.45 23.91 21.54 28.23 26.16 22.41 27.45 24.01 22.63 26.39 21.53 23.95 22.33 21.88 28.48 25.59 24.95 22.94 23.15 27.96 24.02 23. MJ ERVIN & ASSOCIATES 97 .42 25.59 28.23 25.33 21.89 25.78 Product taxes Midgrade Regular 26.39 22.34 26.03 20.96 22.Table H: Study Market Data .01 28.76 24.39 Note: Regional.99 26.45 25.89 28.31 22.33 21.65 21.98 25.83 24.35 25. and All Study Markets are weighted (by market population) averages.82 21.49 31.32 21.16 29.93 23.08 25.81 21.45 29.81 27.81 28.33 22.18 28.18 25.75 22.92 22.25 24.47 20.34 20.45 29.43 20.55 28.26 28.33 21.45 22.43 21.92 30.27 29.69 27.63 24.

85 24.29 7.96 27.50 10.24 23.39 56.14 60.21 24.00 0.20 5.76 5.72 26.89 28.13 0.07 30.98 0.12 6.58 66.22 14.02 0.68 7.98 1.66 28.80 1.Table J: Study Market Data .45 1.96 25.17 9.58 1.70 22.47 58.18 7.77 5.85 26.17 11.01 0. Average Deviation is the average deviation of the market values from their mean (average) value.89 21.98 0.48 7.99 2.68 7.13 11.Blended Prices.26 3.44 25.99 0.03 7.47 0.41 29.83 12.32 31.54 50.02 22.53 22.27 60.75 23.16 54.57 12.50 3.94 17.05 6.35 27.033 0.11 31.81 28.73 10.51 11.62 56.15 66.93 56.91 29.82 32.94 22.21 8.89 0.29 24.31 0.16 3.12 23.35 60.11 26.03 28.22 1.91 0.28 1.16 20.85 11. Urban.50 58.49 57.24 7.24 7.29 8.02 13.64 3.90 23.37 26.31 34.96 28.22 5.08 55.33 9.95 6.50 0.36 0.92 22.26 5.00 58.35 58.80 9.53 21.98 31.63 60.28 56.08 3.04 23.38 22.73 1.25 1.06 28.84 28.27 11.07 0.56 4.44 33.27 6.60 14.49 2.71 33.33 .88 31.91 2.00 22.27 62.97 0.86 28.45 6.01 31.36 20.73 2.82 3.31 23.38 2.64 2.53 6.83 1.43 0.56 24.28 27.34 0.18 21.06 0.44 56. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.04 28.42 2.31 28.00 4.83 21.68 2.95 21.93 22.77 37.94 Note: Regional.84 5.83 27.64 3.60 23.41 7.08 17.79 33.18 55.02 3.30 12.78 2.88 5.64 1.73 22.41 12.17 1.20 14.04 0.43 23.04 22.34 1.86 49.82 95 Retail Gross Product Margin 6.38 28.28 1.85 21. Variance uses the formula [n∑x2 .30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.26 27. Costs.19 5.52 5.17 26.30 5.77 30.07 0.08 0. MJ ERVIN & ASSOCIATES 98 .96 3.10 3. and All Study Markets are weighted (by market population) averages.52 30.10 6.(∑x)2 ]/n2.14 7.35 28.90 59.83 36.60 7.23 7.59 4.79 0.81 26.13 28.21 8.23 38.06 5.38 7.91 22.75 28.38 0.63 58.

but for ancillary revenue.622 $ 174.827.542 $ 222.550 694.074 $ 131.542.913 $ 139. and All Study Markets are weighted (by market population) averages.856 3.911) $ (166.157.102 $ 223.263 $ 60.066 3.646) $ (98.852) $ 119.098.429 $ 238. and consolidated outlet income these averages are based only on those markets with available data.010 1.332) $ (238.071.520 5.144 2.557) $ 102.000 $ 156.197.279 $ 154.716 Note: Regional.746 $ (374.900 $ 179.890.129 $ 97.779 $ 121.023 $ (15.572) $ (286.772.956) $ 200.067 $ 92.794 3.510 $ 60.265.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.934 3.208) $ (226.564 $ 252.632 $ 256.766) $ (274.800 $ 225.526 $ 207.502 $ (80) $ 60.900 2.272 $ 210.246 $ 118. these averages are based on all applicable study markets.013 $ 227.135 $ 199.623 2.837 $ 56.089.871) $ (128. Urban.120 $ 54.467 $ 96.241) $ (227.250.885.224 $ 189.855 $ 278.081 $ 222.272 $ 118.295 $ 174.658.648 3.995 $ 234.217 2.000 2.032 $ 77.223.289 981.719 3.780 $ 85.098 $ (320.544 $ 175.677 $ 180.481 $ 96.993 $ 113.630 3.Table K: Study Market Data .375) $ (49.694 3.095.302 $ 69.948 3. outlet costs.805.875 $ 255.209 $ 26.058.011. For 95 net retail petroleum revenue.478 4. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.367) $ (164. Revenue.209 $ 82. Outlet Costs.004.640 4.000) $ (241.Sales.688 $ 85.638 2.247 4.014.117 $ 207.244 95 net retail Ancillary Revenue petroleum revenue $ 208.626 $ 81.604.750 $ 271.550 $ 177.394.866) $ (244.707 $ 260.068 3.465. MJ ERVIN & ASSOCIATES 99 .966 3.143) $ (249.

605 16.20 0.96 5.45 0.098 4.157 2.06 1 5.394 2.33 0.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.89 2 4.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.43 12.45 14.76 18 5.604 3.775 678.20 17 14.02 0.27 1. MJ ERVIN & ASSOCIATES 100 .41 0.250 981 2.68 4 7.80 10 4.01 7 2.08 3.08 16 3.715 14.24 0.275.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.265 2.52 13 5.06 16 4. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.40 1 3.058 1.54 6 2. inverse ranking is used (lowest value = 1).014 5.30 0.223 3.310 1.40 9 4.60 3.29 1.Table L: Study Market Data . of Brands No. of Outlets No.970 330.50 9.21 0.51 9 11.475 3.23 6 7.89 7.775.675 179.88 12 7.48 7 7.465 694 3.400 74.145 81.53 10 6.845 15.91 12. rank* 3. N refers to study sample size (total = 481).17 19 9.85 15 11.13 2 11.08 4 2.47 14 3.180 616.88 11 8.790 1.004 3.22 3.79 6.98 6.550 1.36 5.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.06 5.90 13 4.745 16.095 3.50 8.000 pop’n No.98 7.04 15 4.10 3.91 17 4.22 0.28 17.60 11 7.827 3.73 14.47 7.00 11.585 6.071 2. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.38 0.27 0.50 3 10.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.Demographic Profiles Population pop’n 299 .23 8 31.95 3 9.84 12 5.73 5 10.870 120.30 1.975 2.55 19 11.542.41 1.42 5 14.29 8 7.315 710.97 8.089 3.658 3.

Principal Address: #400. Vice President Public Affairs Address: 275 Slater Street. Contact: Cindy Christopher. safety and business issues. The SCF is the basis for this study. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. a series of studies whose goal is to strengthen Canada’s competitiveness.14th Street NW Calgary AB. 119 . T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. Contact: Michael J. Senior Advisor. bulk. Ottawa ON. and provide background resources to industry public affairs managers and the media. Contact: Brendan Hawley. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). They maintain a large database of historical prices at most major centres. They work with major oil companies in benchmarking performance in the retail.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. Contact: Maureen Monaghan Address: 580 Booth Street. cardlock. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. health. aviation and lubricants marketing channels. generate jobs and growth. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 .com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. Petroleum Products Address: 235 Queen Street. and in doing so. accessible through a public fax-back dial-in system. Ottawa ON. Ervin. Ottawa ON.

Octane is published quarterly. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Energy Section Address: Statistics Canada. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry.6th Avenue. Contact: Gerard O’Connor. Calgary AB. 101 . Ottawa ON.6th Ave. Contact: Len Bradley. Its monthly publication “Refined Petroleum Products” (cat. and is a useful “window” on this industry.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. no 45-004) is a useful source of supply and demand volume data. SW Calgary. Executive Director Address: 214. Contact: Robert Curran.ab. Supervisor.Octane Magazine Octane is Canada’s refining and marketing trade journal.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Managing Editor Address: Suite 2450. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . 311 .

Sign up to vote on this title
UsefulNot useful